Wash’s congressional hearing debut: even if Trump criticizes it, it will act based on data; June CPI cooling doesn’t mean the inflation “mission” is completed

Author: Li Dan, Wall Street Insights

At the semiannual congressional monetary policy hearing—the first one he has attended since taking charge of the Federal Reserve—Fed Chair Wash said that if he faces pressure from U.S. President Trump, he will “do my job,” and that even if Trump criticizes him, he will take action based on the data. This is Wash’s most direct comment to date on Trump’s challenge to the Fed.

On Tuesday, the 14th, U.S. Eastern Time, during testimony before the U.S. House Financial Services Committee, Wash was asked how he would respond if Trump continued targeting the Fed—such as trying to dismiss Fed governor Cook. Wash said that the U.S. Supreme Court has recently reaffirmed the Fed’s independence in setting monetary policy.

Wash told lawmakers that if he were targeted, “I will continue to do my job.” In a series of questions about whether he would still be willing to set policy based on data even if Trump pressured for lower borrowing costs, Wash said: “The Fed’s independence is sacred and inviolable.” He added: “If we remain independent and are seen as independent by the outside world, our credibility will be enhanced… and that is the best way for us to do our job.”

Commentary suggests that the relationship between Wash and Trump may be tested in the coming months. If high inflation persists, and the calls from other Fed officials supporting rate hikes become too hard to ignore, the dynamic could face greater pressure. At least for now, Wash appears to have believed what Trump told him when Trump took office—back then, Trump told him to be “fully independent… not act according to my face.”

Nick Timiraos, a reporter known as the “New Fed Reporter,” wrote that at the hearing Wash told lawmakers the Fed has “zero tolerance” for high inflation. He said he does not want people to worry too much or feel overly reassured from a single data release. He also quoted Wash as saying, “Maybe someone will look at the (CPI) data this morning and say: ‘Okay, the job is done, everything is just perfect.’ I don’t see it that way.”

Timiraos also pointed out that Wash reaffirmed the Fed’s goal of controlling inflation, but did not indicate the direction of interest rates. He did not discuss his view on interest rates in depth at the hearing, which aligns with his consistent position that the Fed should not telegraph its next steps in advance, and he did not explicitly define the standard for when high inflation evolves into persistent inflation.

The media noted that at this hearing, Wash expressed a firm stance on achieving the inflation target and a clear red line against Trump’s interference, seeking to firmly establish his authority as the Fed’s leader. For markets, the Fed’s “less talk and more action” going forward, the introduction of new inflation indicators, and the “big internal argument” that is about to erupt within the institution as it reduces the balance sheet and adjusts policy tools all suggest that the policy path of the past few years will be thoroughly reshaped.

The Fed has tools to achieve price stability; it will not shift blame on inflation issues

In prepared remarks for the monetary policy hearing, Wash emphasized that the Fed has zero tolerance for persistently high inflation. The opening statement by Financial Services Committee chair French Hill also showed that high inflation is lawmakers’ main concern. He said Congress expects the Fed to continue focusing on its mission to achieve price stability and to stay relentlessly committed until the goal is reached.

Hill not only condemned the sharp surge in inflation, but also criticized the so-called “mission creep” that has emerged at the Fed in recent years. He said: “The Fed needs to avoid repeating past mistakes, reform itself to maintain the long-term independence of monetary policy, and rebuild its reputation as a non-political institution that carries out the lawful directives mandated by Congress.”

Hill told Wash that the Fed can control how it responds to inflation. He asked how, given the existing policy tools, the Fed plans to achieve price stability. He said, “The Fed might choose to ‘see through appearances to the essence,’ ignoring these inflation pressures, but the Fed has held this view before—and it turned out wrong. High inflation affects Americans’ daily lives, not some hypothetical future based on long-term forecasts or inflation expectations.”

In response, Wash acknowledged, “The current situation is complex and changing.” But he reiterated that inflation is a “choice” made by policymakers.

Wash said he has a very critical attitude toward the Fed’s 2020 framework, and that this is no secret. “The Fed’s 2020 framework was wrong. It was not discussed. We want the rise in inflation to be more constrained. The Fed has tools to maintain price stability.”

Wash said: “It’s not time for us to deflect responsibility or blame others. The Fed can, and will, achieve price stability. We have the tools you mentioned—whether interest rate policy or balance sheet policy—that will help us achieve this goal. We have the means to accomplish it.”

Wash later also said he does not believe there is a cruel either-or choice between stabilizing prices and achieving full employment.

Wash said that as long as the Fed can ensure price stability, the economy will be able to thrive and businesses will be able to hire more employees. Therefore, between the Fed’s two major responsibilities assigned by Congress, there is no such thing as a “cruel choice”—this is not a single-choice question where you must pick one and give up the other. He also mentioned that his view differs somewhat from some of his peers in the economics community on this point.

Promise to break “sticky prices”; during the productivity boom in the 1990s, policy could not be simply applied

With the U.S. June CPI inflation data released earlier this Tuesday generally showing cooling, Wash reiterated that he would not claim that the Fed’s inflation “task is done.”

Wash refused to indicate whether rate hikes have already ended. He said the decisions of the Federal Open Market Committee (FOMC) on monetary policy are “not about me,” and he warned markets not to become complacent with a “task is done” mentality just because June CPI recorded its first month-over-month decline in six years.

Wash said: “Although I reviewed the CPI data released this morning, and it performed better than expected, I do not agree with selectively interpreting the data. I won’t stand up and say ‘the task is done.’ Instead, I believe there is still a lot of work to be done.”

Wash pledged to break “sticky prices.” He said the Fed’s responsibility is to ensure that short-term fluctuations in certain specific prices “do not spread and expand.” Unfortunately, what happened over the past few years has been exactly the opposite. He pointed out that, according to “economic principles,” once the inflation rate is above the target level for a period of time, it is usually more difficult to bring it down—this is what is called “sticky prices.”

Wash said, “Those days must be in the past. Our responsibility—also my commitment to you—is to break these sticky prices.”

The media found that at this hearing, Wash had a witty remark: “If you’ve seen one productivity boom, you’ve only seen that one productivity boom.” A few minutes after saying it, he added: “If you’ve seen one financial crisis, you’ve only seen that one financial crisis.”

In the end, Wash’s point was: “When I’m drawing analogical inferences, I will be very cautious.”

Regarding Wash’s remarks about the productivity boom, the media said they were quite thought-provoking—especially considering that some people believe the current AI investment boom has similarities with the surge in IT investment in the 1990s.

U.S. Treasury Secretary Bessent, White House National Economic Council director Hassett, and even Wash himself have all said that in the mid-1990s, then-Fed Chair Greenspan keenly recognized the productivity boom and maintained the Fed’s low-interest-rate policy, which was a wise move. But on Tuesday, Wash’s remark about the productivity boom implied that people should not simply apply that example to today’s situation.

In his hearing remarks, Wash admitted that AI is driving a large increase in business investment, but he pointed out that it is still unclear to what extent the economy will benefit from AI buildouts.

At the hearing, Wash said that in the long run, AI means substantial improvements in productivity. The AI boom “might be the biggest change I’ve experienced since I became an adult.” According to him, this technology not only changes the way innovation happens, but also changes the speed of innovation. He speculated that this AI technology will “enhance” existing work. Even though it may have disruptive effects in the short term, “it will also create many other job opportunities.”

Focus on the Fed’s dual mission of jobs and inflation

At the hearing, Republican lawmakers repeatedly emphasized a point: the Fed has gotten involved in matters beyond its “dual mission,” such as diversity and climate change.

Wash, meanwhile, made it clear that the Fed’s responsibilities are well-defined. If he were leading, when setting monetary policy the Fed would focus on its dual mission.

He said: “The tasks you (Congress) give us (the Fed) are to achieve full employment and price stability. At the same time, you have also assigned us many other difficult tasks. We will carry out a series of reforms beyond monetary policy. Our agenda is already packed, and I assure you we will never get involved in other areas.”

Provide ample warning before balance sheet adjustments

Wash emphasized that the balance sheet is part of monetary policy, saying it is “not just a plumbing system.” Commentators believe this means Wash is willing to tolerate higher volatility in short-term funding markets. Of course, the Fed has standing repo facilities to address market stress, but many people are reluctant to use them. So Wash may believe that this backstop can handle any repo-market turbulence in the future.

Wash said he is not seeking to bring the Fed’s balance sheet back to the 2006 level—that is, back to the level before multiple rounds of QE. But he believes there is a “sustainable equilibrium” in which the balance sheet size would be smaller than the current $6.74 trillion. He said the change will not happen overnight; any adjustments will be made thoughtfully, and it will take “a considerable amount of time” from decision to final implementation.

He said his reservations about the Fed’s balance-sheet policies are not new news. But he said he is not willing to pre-judge what conclusions the task force working on this area might reach, and he said any changes would be communicated thoroughly.

Wash said: “Without providing ample warning to the (Federal Reserve) committee and to the broader financial markets, we will never make any adjustments to balance-sheet policy.”

Wash said he understands that during crises, the Fed needs to step in to establish fair prices in the market. However, in relatively stable times, if the size of the assets the Fed holds exceeds the market itself, then—using former Fed Chair Volcker’s words—this pushes the Fed to the “edge of exercising power.”

Wash added that he believes the Fed should avoid getting involved in fiscal policy when dealing with balance-sheet issues. “We want to stay away from fiscal policy matters,” Wash said.

Five Fed working groups are in the “fact-finding” phase; they will discuss reducing the frequency of issuing statements

In his hearing remarks, Wash outlined what the newly established five Fed working groups will handle. At the hearing, Wash said he would be very happy to “regularly” brief congressional lawmakers on the progress of each working group from now until the end of the year, and said: “By then, I hope we can reach some substantive conclusions.”

Wash said the five working groups are in the “fact-finding” phase, and the relevant groups will “first share their views with decision-makers.” He pledged that the operations of these working groups will never be conducted “in secret.”

Wash pointed out that the mandates of the various working groups will have some “overlap.” For example, the working group responsible for the balance sheet and the working group responsible for communications will have overlapping functions.

Wash previously said that the working group responsible for communications will assess the Fed’s press conferences, economic projections, policy statements, and public speeches.

At Tuesday’s hearing, Wash said he would not commit to a fixed public standard under which a news briefing would be automatically held for every decision and procedural change by the Federal Open Market Committee (FOMC). Instead, whether to hold a news briefing would depend on the specific circumstances.

Wash said the Fed will try to have deeper discussions and reduce the frequency of issuing statements. He noted that the assessment of this communication mechanism and any related adjustments aim to ensure the correctness of monetary policy.

Wash said: “I don’t think any adjustments to the way we communicate are meant to cover up the truth or conceal information. Adjusting how we communicate is intended to achieve a core goal: to ensure that monetary policy is correct and beyond reproach.” In other words, communication reform is not meant to reduce transparency.

When a lawmaker asked Wash why the Fed should abandon the so-called “dot plot” that reflects Fed officials’ interest-rate expectations, Wash said he expects to see the conclusions reached by the working groups he has assembled. He also said he was impressed by how willing his Fed colleagues are to reassess the Fed’s strategies with an “open mindset.”

Wash also noted that in his view, it is more appropriate to take a “more cautious” approach when communicating externally.

Do not interfere with markets casually; using the balance sheet aggressively in a crisis is the exception

Wash reiterated that he will not pre-judge the conclusions of the balance sheet working group. But he said the Fed should be a “price taker” rather than a “price setter.” From that perspective, Wash should support not using the 10-year Treasury yield as a target.

Wash said, “We should not interfere with markets casually.” However, he also mentioned an exception—during emergencies: “As for moments of crisis, I don’t want people to misunderstand that we can stand by. Of course I hope we can stay out of it, but that cannot be guaranteed.”

Wash said he is willing to use the balance sheet aggressively as a monetary policy tool during a crisis. After the crisis ends, monetary policy “should almost entirely be driven by interest rate policy.” Interest rate policy will not favor one group while neglecting another.

He believes interest rate policy should be the dominant policy tool.

No comments on Trump and other executive-branch officials

Maxine Waters, the Democratic leader of the Financial Services Committee, said that while Trump uses his position to “extract huge profits,” he is also undermining the independence of federal regulatory agencies. Wash responded that the Fed will “stick to its proper role” and not get involved in politics. He refused to comment on Trump’s personal financial disclosure report.

Waters asked whether Trump and other executive-branch officials should be allowed to hold companies within their regulatory purview, including companies involved in crypto-assets; Wash refused to comment. He said the Fed will focus on its own responsibilities and will not comment on officials outside the Fed.

Waters then turned to prediction markets. Her remarks appeared to involve insider trading related to government decision-making. Wash mentioned that in his first week on the job, he had written to Fed employees, stressing the importance of maintaining the Fed’s integrity.