June CPI and Fed Chair Testimony

The stock market may be helped by a couple of developments beginning this week --  possibly a low inflation print and the start of strong corporate earnings.  The market also will face a reminder of the Fed's anti-inflation stance with Fed Chair Warsh's semi-annual Congressional testimony on monetary policy.  However, he is unlikely to provide a clue regarding the July FOMC rate decision.

Consensus looks for a decline in the June Total CPI but a high Core.  It sees -0.1% m/m Total and +0.3% Core.  High prices for World Cup games (as well as for intra-/inter city transportation) and a moderate boost to Airfares from seasonal factors could be behind the high Core estimate.  However, price hikes in some components in May (Tax Preparation, Communication Services) will not likely repeat in June.  And, the drop in energy prices may pull down Total and their pass-through hold down Core by more than consensus expects.  So, downside risk to the consensus estimates can't be ruled out.  Moreover, if Core is boosted by World Cup-related components, the high print could be discounted as temporary.

Fed Chair Warsh gives the semi-annual Monetary Policy Testimony this week.  Typically, the summer testimony reflects the consensus view at the June FOMC Meeting.  So, the latter's Minutes likely offers clues to his testimony.

Warsh will probably continue to emphasize the Fed's anti-inflation focus, as he did at the post-FOMC Meeting news conference.  He also may talk about the many issues regarding the measurement of inflation, mentioning how they will be addressed by his newly created task forces.   Nevertheless, the Minutes indicated what is truly of concern to Fed officials:

"The majority of participants highlighted the possibility that, after several years of inflation above 2 percent, continued elevated inflation rates could begin to affect inflation expectations and wage-and price-setting decisions."  

The m/m decline in the Michigan Survey's 5-year Inflation Expectations to 3.3% in June from 3.9% in May should be a relief for Fed officials, although it does not eliminate their concern since the Expectations remain above the 2.8-3.2% range of 2024..  

They still are concerned about the start of a wage-price spiral.  However, so far, there is no evidence of a wage-price spiral developing from this year's various price shocks.  The Minutes said:

"Many participants remarked that the labor market was not currently a source of inflationary pressures, or that nominal wage growth remained consistent with inflation moving toward 2 percent." 

The absence of a wage-price spiral suggests there is no pressing need for the Fed to tighten.  

However, Warsh is unlikely to hint at the next policy move, particularly since the FOMC members' views were mixed at the June meeting.  The Minutes said;

"Regarding participants’ individual assessments of appropriate monetary policy under what each participant judged to be the most likely scenario for the economy, many participants indicated that the appropriate level of the federal funds rate would be within or slightly below the current target range at the end of this year. Many other participants, however, assessed that the appropriate level of the federal funds rate would be above the current target range at the end of this year."

Warsh will likely acknowledge the Fed's other mandate regarding the labor market, but indicate it is not a problem for now.  The Minutes said:

"Participants generally expected labor market conditions to remain stable in the near term, with the
unemployment rate staying close to current levels. Some participants remarked that their concerns
earlier this year about labor market deterioration had eased with recent data, and several participants
noted that the solid payroll employment data in recent months could signal increased labor market
momentum." 

"Several participants cited, however, the possibility that uncertainty related to geopolitical
developments or the broader economic outlook could lead firms to reduce hiring or begin
implementing layoffs. Some participants commented on the possibility that AI could, over time, affect
employment prospects for some classes of workers."   

Similarly, Warsh should give a fairly positive description of the current state of the economy.  The Minutes said:

"Participants generally observed that economic activity had continued to expand at a solid pace,
despite elevated uncertainty, supported by strong business investment and resilient consumer
spending."  

On balance, Warsh's testimony will not likely change market perceptions that the balance of risks tilts toward inflation and that the Fed is focused on it.  However, whether or when the Fed will act may remain uncertain.