When Good News Is Not Good Enough
Markets finally received the inflation data they had been waiting for.
US consumer prices fell in June, with annual inflation easing to 3.5 per cent from 4.2 per cent in May, the first decline in five months and larger than forecasters had expected. Producer prices also surprised on the downside, posting their first monthly decline since August 2025. Energy did most of the work. Gasoline inflation slowed sharply, fuel oil eased, and the monthly CPI print registered its largest single-month drop since April 2020, as pressure from the earlier period of Middle East disruption began to unwind.
On most days, that would have been enough to shift the market conversation decisively towards rate cuts. This was not one of those days.
Newly confirmed Federal Reserve Chairman Kevin Warsh used his first semi-annual testimony before Congress to deliver a message that was disciplined, unsentimental and noticeably different in tone from what markets had grown accustomed to hearing. Inflation control would come first. The Fed would not tolerate persistently elevated inflation. Forward guidance would be reduced. The institution’s earlier average inflation targeting framework was described as a mistake that had allowed inflation to run too hot for too long. He gave no signal on the July meeting and declined to issue the kind of dot-plot forecasts that had previously allowed markets to run ahead of policy.
The data had softened. The Fed had not.
The Fed Is Managing More Than a Number
To understand Warsh’s tone, it helps to remember what the Fed is trying to recover from.
Inflation rose sharply in the early part of this decade, stayed above target for longer than the central bank had projected and eroded public confidence in its ability to preserve price stability. The 2020 average inflation targeting framework, which gave the Fed permission to let inflation run above two per cent for a period, became associated with exactly the kind of policy drift that Warsh now wants to distance himself from. A single favourable CPI print cannot undo that institutional memory, regardless of how welcome the number is.
Warsh’s testimony was therefore less about June inflation and more about resetting how the Fed wants to be understood. His announcement of five independent task forces to review communications, balance sheet policy, economic data use, productivity and the inflation framework itself was not routine housekeeping. It was a deliberate signal that the institution is being restructured around a different set of priorities. When he said the Fed has no tolerance for persistently elevated inflation and that credibility in price stability is the precondition for everything else, he was speaking to the next several years, not the next meeting.
Markets often want central banks to translate every piece of good news into a policy signal. Warsh appeared determined not to do that, and the reasoning is straightforward. If credibility was damaged by declaring victory too early, the new leadership is unlikely to repeat that mistake at its first Congressional appearance.
Why Energy Relief Is Welcome but Not Sufficient
The June inflation numbers were clearly encouraging, and the source of that improvement is worth understanding precisely because it also explains the Fed’s caution.
Most of the headline relief came from energy. Gasoline fell nearly ten per cent on the month. Fuel oil and crude petroleum also declined. That can have a powerful effect on headline inflation, and it did. Core inflation also eased, to 2.6 per cent year on year, which is a more durable signal. But the Fed’s concern is not only where inflation stands today. It is whether the forces driving it lower are themselves durable.
Energy prices are sensitive to geopolitics, supply decisions and shipping routes in ways that monetary policy cannot control. Relief that arrived quickly when tensions eased can reverse just as quickly if conditions change. That makes central banks structurally cautious about treating energy-driven disinflation as a settled outcome. Services inflation, wage growth and underlying demand conditions still matter, and those have not yet moved convincingly enough to change the Fed’s posture. Core PCE, the Fed’s preferred measure, stood at 3.4 per cent in May. Warsh’s stated goal is two per cent. The distance between those two numbers is still considerable.
But Not Every Economy Is Slowing
Singapore’s second quarter numbers make that point in a different way.
The economy expanded by 5.7 per cent year on year, with manufacturing rising 12.2 per cent on AI-related demand. Non-oil domestic exports grew 20.7 per cent in June, with electronics up more than 100 per cent year on year, driven by disk media products, integrated circuits and personal computers. The split within Singapore’s own economy is itself telling. Goods-producing sectors expanded at 10.4 per cent while services slowed to 4.6 per cent. Ten consecutive months of NODX growth is not a picture of an economy losing momentum. It is a picture of an economy being pulled hard in one direction by a specific and powerful investment cycle, while other parts of its activity move at a more measured pace.
That divergence within a single economy mirrors a broader pattern playing out across the global economy. The investment cycle and the consumer cycle are running at different speeds almost everywhere, and that makes it harder for central banks to read the overall direction from any single aggregate number.
The AI Variable That Changes Everything
Warsh’s comments on artificial intelligence were among the most consequential parts of his testimony, and they deserve more attention than they typically receive in market commentary.
He described AI as the most consequential change to the global economy in his adult lifetime. He pointed to the surge in data centre and high-tech equipment investment, up roughly 25 per cent in the first quarter, as the defining feature of current US economic activity. And he made a claim that carries significant long-term implications: that AI will ultimately be deflationary, improving productivity and real wages in ways that ease structural inflation pressure over time.
That long-term argument may well prove correct. The near-term picture is more complicated. AI investment is currently stimulating demand for energy, infrastructure, land, talent and capital at a scale that has few recent precedents. It is strengthening manufacturing and electronics across the technology supply chain while leaving consumer-facing and services-oriented sectors behind. When a central bank looks at an economy where one sector is expanding at double digits, and another is barely growing, the aggregate inflation and growth numbers can obscure as much as they reveal.
The Harder Question
This week’s data gave markets genuine cause for encouragement. Inflation cooled. Producer prices fell. Singapore’s economy expanded well ahead of expectations. Electronics exports continued to benefit from AI-linked demand. China’s nominal momentum improved even as real growth slowed. Temasek’s portfolio crossed S$518 billion, with a one-year return of 10.5 per cent, a reminder that long-term capital continues to find its way through periods of policy uncertainty. The direction of travel across several important indicators was better than it had been.
The difficulty is that better data and changed behaviour are not the same thing, and it is the second that policymakers are waiting for.
It is no longer sufficient for inflation to improve for one month. Central banks need confidence that the improvement can hold through conditions that may look quite different from those that produced it. It is no longer sufficient for growth to hold up in aggregate. Policymakers need to understand which sectors are driving it and whether those forces add to or reduce long-term price pressure. AI investment complicates both questions at the same time.
What Warsh delivered this week was less a policy update and more a statement of intent. The Fed under his leadership will rebuild credibility through discipline rather than optimism, and one month of better data is not enough to change that. Markets received good news. They are still waiting for the kind of progress that would change the policy calculus.
That gap, between data that improve and conditions that durably shift, may be where the most important investment questions of the next twelve months are found.