Federal Reserve Chair Kevin Warsh delivered a stark warning to Wall Street during his first congressional testimony, signaling that the fight against inflation is far from over.
Testifying before the House Financial Services Committee on July 14, Warsh took a firm stance on tackling what he called “sticky prices,” rattling investors who had hoped for relief.
U.S. trailing 12-month inflation surged to a three-year high of 4.2% in May, driven largely by disruptions tied to the Iran war and the closure of the Strait of Hormuz.
President Donald Trump ordered a U.S. military strike on Iran on February 28, prompting Iran to close the Strait of Hormuz to virtually all maritime traffic, halting roughly a fifth of the world’s crude oil supply.
The resulting supply shock sent fuel prices soaring and pushed U.S. trailing 12-month inflation from 2.4% in February all the way to 4.2% by May.
June’s inflation report offered some relief, with headline CPI falling to 3.5%, below expectations of 3.8%, as lower fuel prices dragged the overall figure down considerably.
However, Core Personal Consumption Expenditures, which excludes volatile food and energy costs and serves as one of the Fed’s preferred inflation gauges, has been steadily rising through May.
Warsh addressed this distinction directly in his congressional remarks, stating: “The longer prices have been above the inflation target, it’s usually a bit harder to dislodge them and get them lower. Our job, my commitment to you, is to take sticky prices and to unstick them.”
Warsh himself described the June inflation data as “one data point” and cautioned against using it as evidence that the broader battle against inflation had been won.
His comments reinforced his reputation as a monetary hawk and strongly suggest that interest rate hikes remain firmly on the table as the Fed charts its next policy steps.
The Dow Jones Industrial Average (DJINDICES: ^DJI), the S&P 500 (SNPINDEX: ^GSPC), and the Nasdaq Composite (NASDAQINDEX: ^IXIC) have all recently reached all-time highs, buoyed in part by enthusiasm around artificial intelligence infrastructure spending.
Rate hikes could threaten that momentum by making borrowing more expensive, potentially slowing the AI data center build-out that has been a primary catalyst for the broader market rally.
If that infrastructure spending slows, analysts warn that a rerating of growth expectations and premium valuations for AI-linked stocks could follow, putting further pressure on an already historically expensive market.
