Can the Fed lower inflation? 5 takeaways from Warsh on Capitol Hill. - USA Today

In two congressional hearings dominated by questions on artificial intelligence and central bank independence, Federal Reserve Chair Kevin Warsh kept his commitment simple: He plans to get inflation back to the Fed's 2% target.

Lawmakers pressed Warsh on how the Fed could ultimately bring prices down for consumers when it has little control over some of the things that have been driving them up, including the Iran war. The Fed cannot directly lower prices at the grocery store or gas pump, but it does have tools at its disposal – including its balance sheet and benchmark interest rate – to prevent price increases from broadening into the wider U.S. economy.

“Inflation is a choice. The members of our committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to restore price stability,” Warsh said in his opening remarks to House and Senate lawmakers on July 14 and 15, respectively.

The discussions were also marked by lawmakers’ concerns about how an AI investment boom will impact employment, whether Warsh will prioritize everyday Americans over Wall Street, and the task forces he’s created to help reshape the central bank.

Warsh, in what has become a running theme for the new Fed chair, didn't offer insight one way or the other on the Fed’s next interest rate decision on July 29, but his congressional testimony provided hints regarding where he thinks the U.S. economy and Fed are headed.

Can the Fed bring down inflation?

Year-over-year inflation, or the rate of price increases on U.S. consumer goods, has remained elevated over the past five years. It shot up after the start of the COVID-19 pandemic and reached 9% in 2022 before beginning to slow.

Since the start of the Iran war on Feb. 28, it’s gone back up. It jumped from 2.4% in February to 4.2% in May, driven in large part by the rising cost of gas tied to blockades in the Strait of Hormuz that have limited the global oil supply. It slowed to 3.5% in June – the same month in which the U.S. and Iran reached a temporary cease-fire agreement President Donald Trump has since called "over."

During the July 15 hearing, Sen. John Kennedy, R-Louisiana, asked Warsh whether he thought this inflation would be permanent or temporary.

“It’s not going to be permanent on my watch,” Warsh replied.

ING Chief International Economist James Knightley said in a note to USA TODAY that Warsh’s commitment shouldn’t be seen as all that surprising, as maintaining price stability is one of the Fed’s primary roles. Its other is maintaining maximum employment.

Typically, the Fed raises rates to tame inflation.

"If you really take [Warsh's] statements at face value, the obvious implication would be – as long as inflation is above target – you should just be going hammer and tongs, raising interest rates as much as you need to," said Skanda Amarnath, Employ America executive director and former NY Fed analyst. "I think in practice that's not true. I don't think he's going to just use every opportunity to raise interest rates, because there are trade-offs."

Is monetary policy at odds with other US policy?

Rep. Sean Casten, D-Illinois, asked Warsh how effective the Fed's monetary policy can be if it is at odds with policies enacted by the Trump administration.

“Because I don’t really understand the theory or the case that interest rates undo tariffs or that interest rates undo high oil prices,” Casten said. “Do you have the tools to counter them?”

“We have tools that are powerful,” Warsh replied, adding the Fed takes changes in trade policy, immigration policy, and military conflict into account when it makes decisions.

“Often, they have an effect on prices in the short term,” Warsh said. “Our business is whether those prices in the short term end up spreading out.”

Warsh partially addressed the Trump administration's crackdown on immigration when Sen. Thom Tillis, R-North Carolina, asked him whether net zero immigration would harm U.S. economic growth.