Fed's Warsh on "imperfect measures" of underlying inflation

Federal Reserve chairman Kevin Warsh is testifying on Capitol Hill for the second day Wednesday, this time before the Senate Banking Committee.

• The combination of a few comments he made in Tuesday's hearing before the House and good June inflation data now in hand suggests a rate increase is unlikely at the Fed's meeting in two weeks, while its policy stance the remainder of the year is quite uncertain.

Driving the news: The Labor Department on Wednesday morning released a favorable Producer Price Index reading, showing the overall index fell 0.3% in June, while a core index excluding food, energy and trade services was up a modest 0.1%.

• It came on the heels of Tuesday's similarly disinflationary Consumer Price Index report.

State of play: The data has diminished the market odds of any interest rate increases this year, and made the market-priced odds of a rate hike at the Fed policy meeting concluding July 29 remote.

• While Warsh has sought to avoid giving away much about the central bank's planned actions, a comment he made late in Tuesday's hearing supports the idea that no policy adjustment is imminent.
• "Over the coming period, I'm going to ask our colleagues to have a good family fight about the extent and timing in which we would need to deploy those [policy tools] to deliver on the promise" of price stability.

Between the lines: That remark came late in a three-hour hearing, when Warsh was surely tired and more prone to diverge from his prepared talking point.

• But it sure doesn't sound like a central banker who has made a decision on what he wants to do and is poised to pull the trigger anytime soon.

Of note: While Warsh welcomed the favorable June inflation data, he tamped down any suggestion it offers an all-clear on the price stability front.

• Regarding the PPI data, he said Wednesday morning that "any central bank would be happy to have the data going in the right direction."
• "My view is these are all imperfect measures of the state of underlying inflation," he said, and that a Fed task force will look at how economic data agencies "might think about how they could do a better job in an evolving economy."