Cooler Inflation May Not Be Enough to Stave Off Fed Rate Increases

Hours before Kevin M.Warsh gave his first congressional testimony as chairman of the Federal Reserve on Tuesday, he received some good news.Inflation had finally cooled after a string of punishing increases lifted the annual rate to a three-year high this summer.The reprieve was visible not only in the overall inflation measure, which was driven by a steep drop in energy prices after a preliminary truce to end the war with Iran.

It was also noticeable in the “core” gauge of the Consumer Price Index, which strips out volatile food and energy items.Those prices were flat for the month, bringing the year-over-year rate down to 3.5 percent.The monthly data is always closely scrutinized.

But in the days leading up to Tuesday’s release, it had taken on heightened significance.Christopher J.

Waller, a Fed governor, said on Monday that a “hot” report would have forced the central bank to consider raising interest rates “in the near term.” That was taken to mean at the Fed’s next meeting on July 28-29.The cooler-than-expected data was buttressed by a report on Wednesday that showed wholesale prices declining sharply.Together, that has stifled calls for an imminent rate increase.

However, it has not eliminated the possibility down the road, keeping Mr.Warsh, who has staked his reputation on bringing inflation down, under pressure to prove his commitment to fulfilling that goal.“Unquestionably the more-benign-than-expected data lengthened the runway available to Warsh and his colleagues to consider the situation and mull over whether they’re really going to cross the Rubicon of raising the funds rate,” said David Wilcox, a senior fellow at the Peterson Institute for International Economics and a former leader of the Fed’s research and statistics division.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access.

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