Kevin Warsh’s Fed Holds Firm as Energy Prices Lift Inflation

“The Committee will deliver price stability,” the statement said, a line with the warmth of a locked vault and the subtlety of a tax bill.

The Fed said economic activity is expanding at a solid pace despite elevated uncertainty, partly tied to the conflict in the Middle East. Productivity growth and capital investment remain strong, while job gains have kept pace with the workforce, and unemployment has changed little.

Then energy prices marched in wearing muddy boots.

Energy prices rose 3.9% in May after a 3.8% gain in April and accounted for more than 60% of the monthly headline increase. The energy index climbed 23.5% year over year in May, while gasoline prices jumped about 7% month over month and more than 40% year over year in recent readings.

The rise came as geopolitical tensions tied to Iran and the broader Middle East fed energy-market pressure. The Fed’s statement acknowledged that elevated uncertainty owes partly to the regional conflict.

Core CPI, which excludes food and energy, offered a less dramatic reading but not a clean escape. Core prices rose 0.2% in May and 2.9% year over year, up slightly from 2.8% in April.

Food increased 0.2% in May and 3.1% year over year. Shelter rose 0.3% on the month and 3.4% annually, showing that household costs remain persistent even as some categories cooled.

The implementation note kept the interest rate paid on reserve balances at 3.65%, effective June 18. The Board of Governors also voted unanimously to keep the primary credit rate at 3.75%.

The New York Fed’s Open Market Desk was directed to conduct overnight repurchase agreement operations at 3.75% and overnight reverse repurchase agreement operations at 3.5%, with a per-counterparty limit of $160 billion per day.

The Fed also said it may increase System Open Market Account holdings through purchases of Treasury bills and, if needed, other Treasury securities with maturities of three years or less to maintain ample reserves.

For now, markets and the press will be watching Warsh’s statements closely during his first press conference as Fed Chairman.