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The DXY Index has been trapped between 100.5 and 102 for three weeks, awaiting more clarity on whether the Fed will proceed with the potential rate hike it flagged at the June FOMC meeting later this year.
Fed Chairman Kevin Warsh’s congressional hearings this week are shaping up as a clash between the Fed’s new operating philosophy and Congress’s mandate for oversight. He will first testify to the House Financial Services Committee on July 14, and next to the Senate Banking Committee on July 15.
At the June 16-17 FOMC meeting, Warsh pivoted away from forward guidance by radically shortening the FOMC statement, stripping out the Committee’s previous easing bias and language detailing the balance of risks. Warsh also refused to provide his personal projections for interest rates in the dots, and trajectories for GDP growth, PCE inflation, and the unemployment rate in the Summary of Economic Projections. Despite 9 of the 18 Fed participants predicting at least one hike in 2026, there was a notable dialling back of speeches and public comments by Fed officials after the FOMC.
Lawmakers who value transparency will be concerned that less communication inherently reduces Congress’s ability to review, understand, and check the Fed’s rationale.
Warsh has assembled five external task forces to overhaul Fed operations, which lawmakers, especially Democrats, worry may make the Fed less accountable to Congress and American voters. If a task force is structured as an informal or external advisory group rather than a formal federal advisory committee, it may not be subject to the Federal Advisory Committee Act (FACA). They are not legally required to hold open meetings, take public minutes, or make their internal emails and draft documents available to Congress. Public officials can be removed if they fail the public, but private advisers are insulated from consequences. Fed Governors must be vetted and confirmed by the Senate. These task force members were hand-picked by Warsh. Lawmakers never had the chance to question them under oath about their conflicts of interest before they took the role.
In the end, markets will likely separate political theatre from trading. They are unlikely to lose as much sleep over constitutional mandates as they do the terminal rate and the timing of the next rate move. Markets had given Warsh the benefit of the doubt because of his remark that the Fed has the capability and commitment to return inflation to the 2% target.
Yet, President Trump has made it very clear that he expects Warsh to support his pro-growth agenda. At the European Central Forum in Sintra on July 1, Warsh stated that inflation expectations and inflation risks had come down in recent weeks. Democrats worry that, by launching 9- to 12-month task-force reviews, Warsh is stalling to avoid raising rates before the November midterms.
Hence, markets will focus on Warsh’s reaction to the June CPI data on July 14. Headline inflation is widely expected to decline by 0.1% MoM in June, contrasting sharply from May’s 0.5% rise, due to the plunge in oil prices back to pre-war levels. However, the real test will likely be core inflation, which is expected to remain sticky and unchanged at the same 0.2% MoM (2.9% YoY) level as the previous month. Warsh must prove that his elimination of forward guidance was not a political smokescreen to keep rates unchanged but rather a strategic pivot to restore the Fed’s data-dependent agility.
Quote of the Day
“The ball is round, the game lasts ninety minutes, and everything else is just theory.”
Sepp Herberger
July 13 in history
The first-ever FIFA World Cup kicked off in 1930 in Uruguay, which also won the tournament by beating Argentina 4-2 in the finals.
Topic
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