Recently, Federal Reserve Chairman Warsh completed his first two rounds of congressional hearings since taking office. Coupled with the Fed's latest Beige Book economic report, these two core official signals corroborate and complement each other, fully outlining the Fed's core assessment of the current US economic and inflation landscape. They also clearly reveal the core logic of the current central bank policy differences, the difficulties in regulation, and the subsequent interest rate path, becoming the core basis for pricing the Fed's policies in the foreign exchange and bond markets.

Key statements from the hearing: Maintaining a stable inflation target and rebuilding public trust in central bank policies.

During the two-day hearings in both the House and Senate, rebuilding public trust became the core theme of Warsh's policy statements. Facing pressure from members of both parties—who acknowledged that upward pressure on US prices remained stubbornly persistent and had not shown any substantial easing—Warsh maintained his core stance on stabilizing inflation throughout the hearings. He clearly stated that the Federal Open Market Committee (FOMC) had zero tolerance for high inflation and would firmly push inflation back to the annual policy target of 2%, promising to do everything possible to restore price stability. At the same time, he changed the Fed's past policy communication style, advocating for a tighter approach to forward guidance and a reduction in the release of short-term policy expectations. He advocated for a more cautious and restrained external communication style, preserving the flexibility of monetary policy adjustments and avoiding excessive unilateral pricing by the market that could interfere with policy implementation. Furthermore, Warsh explicitly defended the Fed's policy independence during the hearings, stating that it would not be influenced by external political interference and would make decisions purely based on economic fundamentals. This solidified the foundation of the central bank's policy credibility, and the Fed's independence is conducive to lower market interest rates.

Internal divisions within the Federal Reserve: Reconstructing the inflation assessment system, AI inflation effects sparking a divide in opinion.

Compared to traditional inflation assessment frameworks, the Federal Reserve under Warsh's leadership is reconstructing its inflation observation and analysis system, which is also the core source of current policy disagreements within the central bank. On the one hand, Warsh publicly questions the limitations of traditional inflation indicators such as CPI and PPI, arguing that a single data point cannot fully depict the true nature of core inflation. He also restarts the tracking and analysis of money supply data, reviving the conservative traditional monetary analysis logic of the Fed, asserting that the money supply is deeply linked to inflation trends, thus compensating for the shortcomings of traditional indicators. On the other hand, regarding the widely discussed inflationary effects of AI industry expansion, a clear division of opinion has emerged within the Fed. Officials, represented by Governor Lisa Cook, believe that spending on chips, high-end equipment, software, and related utilities in the AI industry chain will generate a sustained upward risk of inflation, with inflationary pressures already surpassing employment risks. Warsh, however, holds a moderate view, believing that the expansion of AI industry supply-side capacity will quickly match new market demand and will not create widespread, sustained inflation, fundamentally different from the energy supply contraction-type inflation caused by the geopolitical conflict with Iran.

Supporting research and planning: A special working group has been established, but policy differences are unlikely to be resolved in the short term.

To clarify the underlying logic of inflation and bridge internal differences, Warsh led the formation of several special research working groups, including one dedicated to researching the correlation between the AI industry and inflation. However, he admitted that the research would not yield effective conclusions within several months and would be difficult to provide clear support for interest rate decisions in the short term. It is worth noting that the personnel structure of these working groups shows a clear bias, with all members bullish on the development of the AI industry and lacking a perspective from the working class, which has led the market to question the objectivity of the research conclusions.

The Beige Book provides economic evidence: moderate economic expansion and cooling inflation conceal underlying structural risks.

The newly released Federal Reserve Beige Book provides solid economic fundamental evidence for the Fed's complex assessment, resonating with the weakening signals in the June CPI and PPI data, revealing a divergent pattern in the US economy: "moderate expansion, slowing inflation, and lingering risks." On the economic front, eleven of the twelve Fed districts maintained a slight to moderate expansion, with the labor market steadily recovering. Most districts saw improved hiring demand, steady employment growth, and moderate wage increases, with only high-tech and manufacturing sectors experiencing persistent labor shortages. On the consumption side, structural divergence emerged. Overall household consumption rebounded slightly, but rising oil prices continued to suppress discretionary spending, and the trend of downgrading consumption and favoring affordable goods became increasingly pronounced. Inflation showed clear signs of easing, with the month-on-month price growth rate slowing across all districts, and overall prices rising only moderately. However, structural inflationary pressures have not yet dissipated. Middle East geopolitical conflicts and tariff policies continue to push up energy, logistics, and raw material costs. Businesses generally face difficulties in passing on rising raw material prices, limiting their ability to raise prices and squeezing profit margins. Market assessments of inflation trends are diverging. Some jurisdictions believe the short-term decline in inflation will be limited, while others predict further inflation cooling after oil prices stabilize. Overall, the Beige Book data strongly confirms the continued easing of inflationary pressures in the US in late June. Coupled with previous weakness in CPI and PPI, this provides fundamental support for the Federal Reserve to postpone interest rate hikes, and the market currently prices a high probability that the Fed will maintain its current interest rates. However, the subsequent rapid rebound in oil prices will again put pressure on inflation, putting a temporary test on the current cooling trend and adding uncertainty to the Fed's future interest rate decisions.