Kevin Walsh: "Fed Bears Responsibility for Inflation... AI Is the Most Significant Change"

Fed Signals "Regime Change"
June CPI Slows, but "Mission Not Accomplished"

Kevin Wash, nominee for Chair of the U.S. Federal Reserve (Fed), indicated that despite inflation having slowed more than expected in June, it is still too early to declare victory in the fight against inflation. Wash emphasized that he would not tolerate persistently high prices. At the same time, he announced plans for a broad “regime change” at the Fed, hinting at a full review of monetary policy communication, the balance sheet, and data utilization methods.

Kevin Wash, Fed Chair Nominee. Photo by AP Yonhap News.

On July 14 (local time), during a hearing with the U.S. House Financial Services Committee, Wash stated, “Some may look at the data released this morning and say ‘the mission is accomplished and everything is fine,’ but that is not my view.”

On the same day, the U.S. Department of Labor announced that the Consumer Price Index (CPI) for June had fallen by 0.4% from the previous month. The core CPI, which excludes food and energy, remained unchanged from the previous month, significantly underperforming market expectations.

However, Wash made it clear that he would not change policy direction based on a single month of inflation data. He said, “Our committee members will not accept persistently high levels of inflation,” and added, “We share a firm resolve to restore price stability.”

Wash particularly emphasized that the Fed ultimately holds responsibility for inflation. “Inflation is a matter of choice,” he said, adding, “Now is not the time to pass responsibility elsewhere. The Fed can achieve price stability, and it will do so.”

While acknowledging that global conflicts and tariffs—factors outside of the Fed’s direct control—could drive up prices, the Wall Street Journal (WSJ) assessed that Wash was making clear that the central bank should not avoid responsibility for these reasons.

Cautious Remarks on Interest Rate Path... Reiterating Independence

However, he avoided making specific comments on the future path of interest rates. Wash cautioned that if the Fed gives too much advance notice about policy direction, policymakers may fall into the error of accepting only the information that aligns with their existing outlooks.

“We are human,” he said. “To make the right policy decisions, we need a somewhat more cautious approach in communication.” This reaffirms Wash’s previous position to reduce the Fed’s tradition of providing forward guidance to the markets on interest rate paths in advance.

Wash also drew a line regarding the independence of the Fed. When asked whether he would make independent policy decisions based on economic data even if U.S. President Donald Trump publicly called for a rate cut, he replied, “I will.” He went on to state that the Fed’s independence is “sacrosanct,” emphasizing, “I will follow the law and the data.”

The hearing also addressed Wash’s plan for reforming the Fed. Wash said, “We need regime change in policy,” adding, “We must newly review practices that have worked well up to now as well as those that have not.”

He has, since taking office, launched five task forces (TFs) aimed at reevaluating the Fed’s external communication approach, the roughly 7 trillion dollar balance sheet, the way it collects economic data, as well as the frameworks for analyzing productivity, employment, and inflation. Wash said he expects these TFs to deliver concrete conclusions by the end of the year.

Regarding the U.S. economy, he assessed it to be “overall stable,” and described artificial intelligence (AI) as a key variable that can significantly boost the economy’s productivity.

He noted that AI “may be the most significant change to appear in the U.S. economy during my adulthood,” calling it “a tremendous opportunity.” He also mentioned that investment in data center construction and AI equipment and software has led to a sharp increase in corporate investment, with spending related to advanced technology rising by about 25% over the past year.

However, he cautioned that it may take time for AI to lead to actual productivity gains and wage increases, emphasizing, “We need to monitor the situation on a monthly and quarterly basis.”

Meanwhile, on the same day, the U.S. Bureau of Labor Statistics announced that the Consumer Price Index (CPI) for June rose 3.5% year-on-year, a significant slowdown from May’s 4.2% and below the 3.8% expected by experts polled by Dow Jones. Month-on-month, the CPI declined by 0.4%, falling significantly more than market expectations of a 0.2% drop. The monthly decrease was the largest since April 2020, during the onset of the COVID-19 pandemic, when it declined by 0.8%.

The core CPI, excluding energy and food, increased by 2.6% from a year earlier, a slowdown from the 2.9% gain in May, and remained flat compared to the previous month. With this marked slowdown in June CPI, the market views the chance of a rate hike by the Fed at the July Federal Open Market Committee (FOMC) as significantly reduced.

This content was produced with the assistance of AI translation services.