New Federal Reserve Chairman Walsh faces congressional tests for the first time: Can “talk less and do more” work? Inflation and independence are the focus of questions

The Zhitong Finance App notes that during Kevin Walsh's first month as chairman of the Federal Reserve, he has clearly expressed his opinion: when explaining his views on the economy, less is more. In fact, Walsh has remained largely silent on related market issues.

But this week, as Walsh testifies in Congress for the first time as Chairman of the Federal Reserve, he will face a group of lawmakers who want answers. This hearing is a law requiring the Chairman of the Federal Reserve to attend the semi-annual monetary policy report hearing twice a year. Meanwhile, the Federal Reserve submitted this official report to Congress in advance last Friday (July 10). In the report, policymakers clearly reiterated the Fed's ironclad position — “the committee will stabilize prices” and vowed to push the inflation rate back to the target level of 2%.

Congress will investigate anti-inflation routes, and Walsh needs to prove the independence of the Federal Reserve

Mark Spindel, chief investment officer at Potomac River Capital, said, “Walsh must respond to his bosses on Capitol Hill.”

Jonathan Pingle, chief US economist at UBS, said that it is difficult for Walsh to deduce that the Fed's approach to dealing with the risks in the outlook cannot be discussed.

He added that members of Congress would like Walsh to clarify his plans to reduce the inflation rate to the Federal Reserve's 2% target. This is also the “fundamental reason” for summoning Walsh to testify before the Commission.

Walsh will attend the House Financial Services Committee hearing at 10 a.m. ET on Tuesday and the Senate Banking Committee hearing the next morning. Ironically, this group of congressmen who are about to interrogate Walsh is the same group of people who just voted to confirm his appointment as chairman of the Federal Reserve in May of this year. At the induction hearing at the time, Walsh was treated “like home” by the Republicans, but was extremely harshly tortured by Democratic lawmakers about “whether he would become a Trump puppet.” This week, this political tug-of-war over the “independence of the Federal Reserve” is bound to unfold again.

Faced with strong questions from the outside world about his “White House spokesperson,” Walsh recently publicly and solemnly stated his attitude: “The Federal Reserve has been independent for a long time. At this moment, we will also be an independent central bank, and you will not see any changes.” But what the market cares more about is his policy actions.

Inflationary pressure remains high, and differences between the Fed's internal interest rate hike and wait-and-see factions have intensified

The system shows that when Walsh's testimony was published, the Federal Reserve's interest rate decision committee had clearly turned in the direction of a possible rate hike. In June of this year, nine Federal Reserve officials predicted an interest rate hike this year. Six of them thought there would be more than one move. In the semi-annual monetary policy report just released by the Federal Reserve, officials revealed a major fact: due to high inflation, the current federal funds rate (3.5% to 3.75% range) is clearly low according to several mathematical policy rules (Mathematical Policy Rules) commonly used within the Federal Reserve, and the model is calling for higher interest rates.

Currently, the Federal Reserve's most popular inflation indicator, the core PCE price index, still rose 3.4% year on year in May, and is still far above the 2% target. According to the latest data from CME's FedWatch tool, the financial market is frantically repricing. Currently, the market is not only widely betting that the Fed will raise interest rates at least once before the end of this year, but even believes that at the upcoming interest rate meeting at the end of July, the probability that the Fed will directly raid interest rate hikes has soared to one-third (about 33%). According to the Atlanta Federal Reserve's market probability tracking tool, the market believes that the probability of raising interest rates before September is 70%.

Claudia Sam, chief economist at New Century Consulting and a former Federal Reserve adviser, said she believes some central bank officials are losing patience and are ready to lower inflation by raising interest rates.

However, there is another faction of Federal Reserve officials. They believe that the central bank can be patient and see if inflation falls slightly before taking action. Especially considering the recent global fuel supply crisis (fuel crunch) caused by the outbreak of the US-Iran war, US inflation is once again under pressure. In the Federal Reserve's report on Friday, policymakers confessed that apart from the sharp rise in energy prices caused by geographical conflicts, tariff barriers driving up commodity prices, and the insane demand for components such as semiconductors in AI data centers have all become the driving forces behind high inflation.

Rejecting forward-looking guidance, Walsh tried to copy the Volker and Greenspan route

While running for this position, Walsh advocated interest rate cuts through television and other channels — this was the position the White House preferred at the time. However, as chairman, he insisted that he would not prejudge the outcome of the July interest rate meeting. At the Central Bank of Portugal's Sintra Forum in early July, in the face of the global market's snooping on policy paths, he showed a strong defensive stance, directly refusing to provide any forward guidance (Forward Guidance), and said in tai chi, “I won't give forward-looking guidance because we will meet in four weeks. I wanted us to close the door in that room and have an intense 'family fight' and debate, but now I have nothing to comment on.”

In this regard, he made it clear that he is trying to follow the example of former Federal Reserve heads Paul Walker and Alan Greenspan, both of whom have tried to talk as little as possible in public in the past.

This attitude has made the National Assembly unhappy. These two Federal Reserve presidents have gone down in history for their epic game with the legislature. When Volker — who worked long ago, so much so that smoking was allowed in the hearing room at the time — doesn't like a question, he disappears after hiding in a large cloud of cigar smoke.

Greenspan, on the other hand, is remembered for saying to a member of Congress, “If you think you understood what I said, then you must have misunderstood what I meant.”

Spindel said that the chairman's testimony was similar to that of former Secretary of State Henry Kissinger asking reporters if they had any questions about the answers they had prepared for him.

Spindel said that Walsh's approach is likely to be met with resistance because when he first testified, he did not have the same prestige as Walker or Greenspan. “When he took office, he didn't have as many qualifications as Paul Walker or Alan Greenspan, with a long history of empirical analysis.”

Furthermore, lawmakers are also preparing to vigorously question him about “whether AI is the antidote to inflation or the poison.” When Walsh took over as chairman of the Federal Reserve, he was optimistic, believing that AI could reduce inflation by increasing productivity, thereby allowing the central bank to cut interest rates. However, when confronted with questions last week, he apparently couldn't deny the fact that AI data center construction is driving demand like crazy. He can only vaguely claim that AI's inflationary effects are currently reflected on the “demand side” of the economy, “but I am confident that at some point in the future, I will see its effects (reduce inflation) on the 'supply side'.”

CPI data collided with hearings, and Walsh faced both political and economic pressure

To make matters worse, the day Walsh testified on Tuesday, coincided with the release of the US CPI (Consumer Price Index) data for June. Although oil prices fell back thanks to Trump's previous actions, the market expects that the CPI growth rate in June may fall slightly to 3.8% from 4.2% in May, and the core CPI to 2.8%, but this still cannot ease overall inflation anxiety. On Wednesday that follows, the US will also release PPI (Producer Price Index) data. This barrage of hardcore data bombardment will directly burn Walsh on the fire.

In addition, Democrats on Capitol Hill see Walsh as a close ally of the White House, although the Federal Reserve is supposed to operate independently.

They are unlikely to relent, because they are aware that if US President Trump and the US Federal Reserve Chairman he has placed can be linked to high inflation data, they have a chance to seize control of at least one of the two houses of Congress in November.

Walsh may also try to avoid problems. As he did at his first press conference as chairman in June, he will tell lawmakers that he has set up five working groups to help him achieve “institutional change” at the central bank. According to the latest disclosure, these five working groups will redefine the Federal Reserve in all its aspects. They focus on: the Federal Reserve's public communication mechanism, balance sheet (downsizing) policy, the quality of existing economic data sources, the central bank's review mechanism for inflation, and how artificial intelligence (AI) will impact future productivity and employment.

Spindel said that these promotion strategies may not work on Capitol Hill this week. “Congress is a way to force you to speak up.”