Will the FOMC raise the federal funds rate (FFR) at its July 28-29 meeting? Foggetaboutit! Today's CPI inflation report was surprisingly subdued across the board. Inflation remains above the Fed's 2.0% target, so the FOMC is likely to maintain its tightening stance, which was adopted in June. However, after the latest inflation report, there is no rush for the FOMC to act, contrary to our earlier expectations.
Our Roaring 2020s scenario may be working its magic as productivity growth has reduced unit labor cost (ULC) inflation to 0.5% y/y during Q1-2026 (chart). During the previous inflation surge, ULC inflation soared due to a significant wage-price spiral, which isn't happening this time.
Let's review today's important Fed-related developments:
(1) Warsh's Spin. The topic of inflation dominated Kevin Warsh’s first congressional testimony as Fed chair today. He stressed that the Fed has “no tolerance for persistently elevated inflation” and remains committed to returning inflation to 2%, arguing that inflation is ultimately the responsibility of monetary policymakers.
Warsh cautioned against viewing June’s lower-than-expected CPI inflation report today as “mission accomplished,” emphasizing that the Fed’s credibility depends on restoring price stability. At the same time, he was enthusiastic about the AI boom, which he saw as a reason to be optimistic about the outlook for the economy and inflation. He said that the spending on data centers, software, and infrastructure should boost productivity, raise the economy’s non-inflationary growth rate, and help ease inflation pressures over time. His core message was that the Fed must stay focused on inflation while recognizing AI’s potential to support stronger, less inflationary growth.
In other words, the new Fed chair endorsed our Roaring 2020s narrative!
