Federal Reserve Chairman Kevin Warsh's remarks at a press conference last Wednesday (July 29) were widely interpreted by the market as a dovish signal of easing. However, a deeper analysis of his complete statement and policy tone reveals that the market has made a clear misjudgment. Warsh actually retained a strong inclination to raise interest rates, and the risk of further monetary policy tightening is far greater than the market expected.

Warsh's stance on the short-term cooling of inflation is not accepted; he remains extremely cautious.

Previously, the US Consumer Price Index (CPI) fell 0.4% month-on-month in June, a rare decline that provided short-term data support for cooling inflation. Following conventional policy logic, Warsh could have used this positive data to signal easing and reassure the market. However, he did not interpret it optimistically; instead, he deliberately downplayed the significance of a single month's data. He explicitly stated that the high inflation problem, which has persisted for over five years, cannot be completely resolved through a mere nine-week adjustment or a small monthly price decline, directly refuting market speculation that short-term inflation would lead to policy easing.

The remarks drew criticism from the market, with some dovish interpretations suggesting a bias.

This press conference, Warsh's second since taking office, was marked by vague wording and illogical statements, leading to significant market misunderstanding. The market initially believed that Warsh, traditionally a hawk and focused on inflation control, was downplaying inflation concerns, with some even speculating that he was swayed by external demands for interest rate cuts, undermining the Fed's policy independence. This directly resulted in market doubts about the Fed's credibility, causing volatility in capital markets. However, the market overlooked the official written statement presented at the beginning of the conference. This pre-prepared core policy stance by Warsh was far more authoritative than the impromptu questions. In the statement, Warsh reiterated his firm policy stance, clarifying that the Fed does not have an easing inflation target and will consistently anchor its core inflation standard at 2%, while also stating that it will decisively implement regulatory policies at the appropriate time.

Hidden multiple tightening tools: a two-pronged approach of balance sheet reduction and interest rate hikes.

Compared to a single interest rate adjustment, Warsh is devising a more comprehensive tightening monetary policy. This policy meeting not only discussed the benchmark interest rate but also focused on analyzing monetary policy tools and balance sheet control strategies. He has long advocated for the Fed's balance sheet reduction reform, which can effectively tighten the financial environment, with a control effect highly similar to interest rate hikes. Currently, the relevant reform working group will not issue a report until the end of the year at the earliest, and the Fed has not yet implemented balance sheet reduction measures. However , Warsh's proactive mention of policy tool adjustments sends a clear signal: in addition to interest rate hikes, balance sheet reduction will also become an important control tool. At the same time, he holds a cautious attitude towards the long-term benefits of artificial intelligence in empowering the economy, improving supply, and suppressing inflation, clarifying that the timing and strength of supply-side improvements are difficult to predict, and he does not agree with the logic of relying on economic structural transformation to alleviate current inflationary pressures.

With the interest rate hike window approaching, the market may face a sharp correction.

Referring to the policy styles of previous Federal Reserve chairs, statements of "timely and decisive action" are not empty rhetoric but often foreshadow substantial policy adjustments. Considering the current situation, Warsh has not abandoned the anti-inflation strategy, and the current dovish market interpretation is completely distorted. He is most likely waiting for the two inflation data releases before the September FOMC meeting to use as a basis for his interest rate decision. The market skepticism surrounding this press conference may further push him to decisively implement interest rate hikes, and market funds that previously bet on easing will soon face significant volatility due to large-scale liquidation and correction. Overall, the current inflation inflection point is not yet stable, the Fed's policy bottom line remains unchanged, and the easing trend driven by market misjudgment is unsustainable; further monetary policy tightening remains the most likely scenario.