In his testimony before the House Committee on Financial Services, Federal Reserve Chairman Kevin Walsh stated that, as long as monetary policy was properly adjusted, the surge in inflation over the past five years would soon end. This was the first time that he had submitted a semi-annual statement of monetary policy to Congress about five weeks after his appointment.

Inflation remains above target

Walsh said to parliamentarians that consumer prices had seen the largest single-month decline since 2020, but that current inflation levels were still significantly above the Fed’s 2 per cent target. He argued that inflation was not an accident, but a policy outcome, and that the first priority of the Fed was to adjust monetary policy to the right level as far as possible.

He further stated that if the policy direction was correct, the upward trend in inflation over the past five years would be historic. This was also the clearest inflation statement he made at the hearing.

Denying that there is only one choice between employment and inflation.

In his testimony, Walsh also refuted the long-standing traditional perception that there was a trade-off between employment and inflation. He stated that he did not agree that a “cruel choice” had to be made between the two.

According to him, strong growth, low inflation and robust employment can coexist if policies are properly implemented. This statement shows that he is trying to define the current policy objectives of the Fed in a more proactive manner.

AI Investing into the economy

Turning to the current state of the economy, Walsh stated that, while household consumption in the United States had been moderate and manufacturing output had continued to rise this year, the housing market remained weaker than the overall economic expansion.

In particular, he noted that business investment was the most prominent part of the current economy, with equipment expenditure increasing by about 8 per cent in a year up to the quarter, driven mainly by data centre construction and AI-related needs. High-tech investment grew by nearly 25 per cent in four quarters.

  • Expenditure on equipment increased by approximately 8 per cent per year
  • High-tech investment in four quarters has increased by nearly 25 per cent.
  • Housing market performance is weaker than overall economy

The situation in the Middle East remains a source of price risk

This hearing is taking place at a time when the situation in the United States, Israel and Iran continues to drive the energy market. Walsh indicated that the Fed was concerned about how the AI investment boom could be transmitted to inflation and the labour market, while also being alert to the new price shocks caused by the geographical situation.

In June, CPI data showed that inflation had cooled as regional tensions subsided, but the overall reading had not returned to the Fed's target zone. Walsh will also travel to the Senate Banking Commission on Wednesday to continue the second parliamentary hearing.