PPI data lowers market odds of interest rate increases this year

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."