The logic and deduction of Federal Reserve policy in the “Wash Era”
□After taking office, Warsh is systematically restructuring the Fed's policy framework, with the core of which is the primary mission of returning to price stability. He clearly opposes the Flexible Average Inflation Targeting (FAIT) introduced in 2020, advocates reanchoring the 2% inflation target, and favors the use of new indicators such as "truncated mean PCE".
□ After taking office, Warsh is systematically restructuring the Fed's policy framework, the core of which is the primary mission of returning to price stability. He clearly opposes the Flexible Average Inflation Targeting (FAIT) introduced in 2020, advocates reanchoring the 2% inflation target, and favors the use of new indicators such as "truncated mean PCE". In terms of communication strategy, he abandoned forward guidance and turned to meeting-by-meeting decisions that relied entirely on data, marking the Fed's official entry into the "data-driven mode." □ Although inflationary pressure in the United States has eased, the AI investment boom, geopolitical risks and trade policy uncertainty still pose upward pressure. Taken together, Warsh may take advantage of the fact that the U.S. economy is still resilient to demonstrate a hawkish stance to establish his credibility, but his underlying intention may still be toward lowering interest rates. Therefore, there is a high probability that the Federal Reserve will keep interest rates unchanged during the year, and the current market pricing of interest rate increases may have been overpriced. □ In the long term, if AI-driven productivity improvements ease U.S. inflationary pressures, the Fed's restart of interest rate cuts will benefit risky assets; conversely, if the Fed is forced to cut interest rates due to economic deterioration, the market will first experience the impact of shrinking risk appetite. Against the background of rising risks of co-resonance in the global financial market, the uncertainty of the Federal Reserve's policy will be transmitted to the global market at an accelerated pace through capital flows, risk appetite and exchange rate channels. With the unexpected fall in inflation data intertwined with internal changes at the Federal Reserve, the future direction of the Federal Reserve's monetary policy has become increasingly confusing. The latest U.S. CPI and core CPI data for June were both lower than expected. Although it brought a breather to the market, Federal Reserve Chairman Warsh did not give a clear signal on interest rates and instead reiterated his anti-inflation stance. At the same time, the official appearance of the five major working groups within the Federal Reserve and the U.S. Department of Commerce’s Bureau of Economic Analysis planning to adjust the PCE statistical method at the end of September will further complicate the policy outlook. Amid multiple variables in data, personnel and institutional changes, the Federal Reserve is standing at a critical crossroads. This article will provide an in-depth analysis of the restructuring logic of the Federal Reserve's monetary policy framework under the leadership of Warsh, and deduce the most likely path of its policy in the future and its impact on global financial markets. Reconstructing the Fed’s Policy Framework On May 22, local time, Kevin Warsh was officially sworn in as the 17th Chairman of the Federal Reserve. Since being nominated in April and being questioned at a Senate hearing to elaborate on his economic philosophy, Warsh has gradually outlined the outline of his policy framework through a series of public speeches, involving multiple dimensions such as inflation concepts, balance sheet policies, adjustments to communication strategies, independence of monetary policy, and the economic effects of technological progress. On inflation management, Warsh showed a clear stance that was completely different from his predecessor. Different from Powell's statement that high inflation was attributed to the combination of external shocks and internal overheating, Warsh's iconic statement was that "inflation is a choice and the Fed must take responsibility" and made it clear that there is "zero tolerance" for continued high inflation. In terms of institutional framework, Warsh rejected the flexible average inflation targeting (FAIT) introduced in 2020 and advocated re-anchoring the 2% inflation target. Moreover, Warsh has repeatedly expressed dissatisfaction with inflation indicators and guided the internal use of alternative indicators. Warsh made it clear at the Senate hearing in April that he prefers the "truncated mean PCE" inflation indicator, believing that this indicator can effectively eliminate tail risks and all one-time price shocks, providing more convincing support for judging whether inflation has substantially improved. In terms of balance sheet normalization, Warsh has always opposed the normalization of quantitative easing (QE) and supports the return of monetary policy to the traditional regulatory paradigm centered on interest rates. This stance directly points to the QE tradition started in the Bernanke era: After the outbreak of the international financial crisis in 2008, Bernanke lowered interest rates to zero and launched three rounds of QE. The size of the Fed's balance sheet rose from about US$900 billion to US$4.5 trillion. Although Yellen started shrinking the balance sheet during her term, the pace was more cautious; during the Powell period, "unlimited QE" was launched under the impact of the epidemic, which once brought the balance sheet size to nearly US$9 trillion.
In response to this historical problem, Warsh reiterated his hope to reduce the size of the balance sheet at the European Central Bank's annual central bank forum held in Sintra, Portugal, on July 1. He said that the current balance sheet size of approximately US$6.7 trillion is much higher than the pre-epidemic level. This huge volume has been accumulated over approximately 18 years, and its nature is close to that of a fiscal tool. In terms of communication strategy, at a Senate hearing in April, Warsh emphasized that he hoped for an institutional change in the Fed's communication strategy. He prefers to maintain "strategic ambiguity," questions the value of regular post-meeting news conferences and advocates reducing the frequency of public speeches by Fed officials. Since Warsh's first press conference after the interest rate meeting in June, the change in the Fed's communication strategy has been first seen: that month, the length of the statement at the interest rate meeting was greatly reduced; Warsh not only refused to provide interest rate forecasts with other Fed officials, but also refused to disclose policy preferences at the post-meeting press conference, resulting in a significantly shortened press conference. He made it clear in his debut that he hopes the market will tell the Fed what interest rates should be based on economic data, not the other way around. Since then, Warsh further set the tone at the Sintra Forum that the Fed will no longer provide forward guidance on interest rates and will instead rely entirely on the latest economic data for meeting-by-meeting decisions. This marks that the Fed's communication framework has shifted from the "forward guidance era" to a "data-driven model." Warsh took office at a time when concerns were growing about Trump interfering in the Fed's decision-making and undermining the independence of monetary policy. Therefore, whether the Federal Reserve's independence can be maintained has become the first test that Warsh will face after taking office. At the aforementioned Senate hearing, Warsh made it clear that Trump had never asked him to commit to any specific interest rate decision, stressing that "I would never do that." This stance continues the Fed chairman's tradition of defending independence. But unlike the Powell era, which deliberately kept a clear distance from the White House, Warsh adopted a new model of high-frequency contact but maintaining independent decision-making. Regarding the economic effects of technological progress, Warsh showed similar views to Greenspan's views on the "new economy" in the 1990s. As early as when he was running for chairman of the Federal Reserve, he described an optimistic vision of artificial intelligence (AI) reshaping the economy, believing that the productivity improvements brought about by AI applications would eventually reduce production costs and increase aggregate supply, thus putting downward pressure on inflation. Strategically, this is the core basis for his advocacy of future interest rate cuts; but tactically, he will still consolidate his anti-inflation credibility through a short-term hawkish stance. To support his judgment, Warsh established the "Productivity and Employment Working Group" immediately after taking office to assess the impact of new general-purpose technologies, including AI, on the economy. Taken together, Warsh's policy propositions are similar to those of previous Fed chairs, but also show significant differences in the times. He has repeatedly emphasized the need to return to the core responsibility of the Federal Reserve: maintaining price stability, and regards this as the "first principle" of monetary policy. At a Senate hearing in April, he even stated that he planned to issue guidelines to regional fed banks to prohibit them from participating in over-the-top issues such as climate change advocacy, lobbying for state constitutional amendments, and racial equity policies. This series of statements is essentially a comprehensive reflection and reconstruction of the Fed’s policy paradigm and functional boundaries over the past decade or so. This systemic reform intention was implemented in Wash's first performance after taking office. Warsh announced the establishment of five task forces, focusing on key areas such as Fed communications, balance sheet policy, data use, productivity and employment, and inflation framework. The reform of the Federal Reserve is far away and cannot quench the near thirst. After announcing the establishment of five working groups in June, the Federal Reserve appointed more than a dozen experts to lead the five working groups on July 9. The expert panel includes experienced economists, business leaders and former central bankers, marking the beginning of the implementation phase of Warsh's plan to reshape the Federal Reserve. According to the deployment, the five working groups will operate independently with the support of Federal Reserve staff, follow an evidence-based approach, and submit rigorous research results to the Federal Open Market Committee (FOMC). The relevant work is expected to be completed before the end of the year. However, although relevant research results are expected to provide important reference for Wash's policy proposals, there are still many uncertainties about whether they can be successfully implemented in the end, and the market should not expect too high expectations for the effectiveness of the reform.
First, Warsh’s policy proposition may not be fully supported by the working group’s research findings. The leaders of the five working groups span multiple fields and have certain differences in their views. While this diversity helps reduce outside doubts about the research results, it also means that relevant reports may run counter to Warsh’s policy advocacy. Take the Inflation Framework Group as an example. According to the analysis of the British "Economist" article, the positions of its three leaders are different: Nobel Prize winner Thomas Sargent is a staunch supporter of the inflation target; former Bank for International Settlements (BIS) economic advisor William White believes that the target system not only pushes up global debt, but also amplifies the cyclical fluctuations of financial "boom and bust"; while Greg Mankiw, professor of economics at Harvard University and former chairman of the Council of Economic Advisers, supports the target system, but opposes the "false precision" target of 2%. Even on the balance sheet policy, where Wash has always been clear, the opinions of those responsible are divided. Among them, Jeremy Stein, professor of economics at Harvard University and former governor of the Federal Reserve, argued in a paper at the Jackson Hole Conference that the Federal Reserve's maintenance of a relatively large balance sheet is conducive to financial stability, because abundant reserves reduce the dependence of financial intermediaries on short-term highly volatile financing instruments, fundamentally reducing the accumulation of run risks. Raghuram Rajan, a professor at the University of Chicago and former governor of the Bank of India, warned that the QE policy is asymmetrical and that shrinking the balance sheet is more difficult than expanding it. He pointed out that the reversal of QE is not smooth sailing, but will produce a one-way "ratchet effect": when the Federal Reserve injects large amounts of funds into the financial system, the lending habits formed by banks will not disappear with the policy reversal. This makes the financial system (especially smaller, undercapitalized banks) dependent on the large-scale funds injected by the Fed. Once the policy changes and funds are withdrawn, the financial system will face numerous risks. Secondly, the Federal Reserve is not a "one-man shop". Monetary policy is formulated jointly by 12 voting members, not by the chairman alone. In fact, before Warsh officially took office as Fed Chairman, differences within the Fed were already prominent. For example, at the April interest rate meeting, the number of dissenting votes hit a new high since 1992. Although Warsh helped build internal consensus by establishing five working groups to review the Fed's core functions, the authority of the working groups was limited to providing advisory recommendations and did not have decision-making power. Whether relevant research results and policy propositions can ultimately be adopted and implemented still depends on whether Warsh can win the support of Fed governors and regional Fed presidents. This obviously poses a severe test to its political wisdom and coordination ability. Interest rate policy may remain on hold At the beginning of this year, the market was still trading in expectations for a rate cut by the Federal Reserve, with two rate cuts widely expected during the year. However, with the outbreak of geopolitical conflicts in the Middle East at the end of February, expectations for interest rate cuts have significantly weakened. The Chicago Mercantile Exchange (CME) FedWatch Tool also shows that the current market expectation is that the probability of the Fed cutting interest rates this year and next is close to zero. Looking forward to the second half of the year, as the AI investment boom continues, the situation in the Middle East changes, and the impact of tariff policies, the risk of rising inflation in the United States remains prominent, restricting the Federal Reserve's interest rate cut process. First, the inflationary effect of AI appears before the deflationary effect. Warsh's core basis for advocating for interest rate cuts is that AI can increase productivity and bring about a deflationary effect, allowing the economy to achieve rapid growth without triggering inflation. But the reality is that the inflationary effects brought about by artificial intelligence have appeared before the deflationary effects this year. Prices of chips, high-tech equipment, software and utilities have risen sharply, driven by increased capital spending on artificial intelligence infrastructure. On July 15, Federal Reserve Board Governor Lisa Cook pointed out that artificial intelligence construction shows no signs of slowing down. Companies have announced more than 1.5 trillion US dollars in data center construction plans, but only a small part has been implemented. There are huge investment needs in data centers alone, and other AI-related capital expenditures are also likely to grow significantly in the coming years.
Second, geopolitical conflicts in the Middle East have recurred, driving up oil prices. Since the ceasefire agreement broke down on July 8, the US military has launched continuous air strikes against Iran. On July 23, Trump stated that he was "seriously considering" restarting large-scale combat operations against Iran. On the same day, the Islamic Revolutionary Guard Corps announced a "complete blockade" of the Strait of Hormuz. Affected by this, Brent crude oil futures prices broke through the $100 per barrel mark again on July 23. Third, uncertainty about U.S. trade policy still exists. In February this year, the U.S. Supreme Court ruled that reciprocal tariffs based on the International Emergency Economic Powers Act (IEEPA) were invalid. Since then, the U.S. government has imposed a 10% temporary tariff on global trading partners in accordance with Section 122 of the Trade Act of 1974. On July 23, the United States invoked Article 301 of the 1974 Trade Act and imposed additional tariffs of 10% to 12.5% on 60 economies on the grounds of "inadequate enforcement of forced labor". The tariffs officially took effect the next day to replace the expired Article 122 tariffs. But at the same time, recent U.S. inflation and labor market data also support the Federal Reserve to take more prudent actions, and there is currently no urgency to raise interest rates. First, U.S. inflation expectations are well anchored and actual inflation pressure has eased. From an expected perspective, the five-year breakeven inflation rate implied by the U.S. Inflation-Protected Securities (TIPS) market is 2.3%, which is basically stable around the 2% policy target. Judging from actual data, the year-on-year growth rate of U.S. CPI in June dropped from the previous 4.3% to 3.5%, and the core CPI growth rate dropped from 2.9% to 2.6%, both hitting new lows in the past three months. Market institutions predict that the core PCE growth rate in June, which will be released at the end of July, may also fall. Second, inflation data may experience a technical downward revision. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce plans to adjust the statistical method of the PCE price index in September, mainly revising the statistical caliber of investment management services, computer software and legal services. Market agencies estimate that this move will technically lower the core PCE inflation reading by about 0.1 to 0.3 percentage points, which may help support the dovish stance. Third, the labor market continues to cool. In June, the number of new non-farm jobs in the United States was only 57,000, significantly lower than market expectations of 115,000, and the total number of new jobs in the previous two months was revised down to 74,000. That month, the unemployment rate fell by 0.1 percentage points from the previous month to 4.2%, but the labor force participation rate fell by 0.3 percentage points to 61.5%, a new low since April 2021; the ratio of job vacancies to the number of unemployed people was close to 1:1, far lower than the 2:1 peak in 2022. Fourth, the financial market poses obvious constraints on interest rate hikes. The Bank of America Global Fund Manager Survey (FMS) in July showed that 45% of respondents listed the "AI bubble" as the current biggest tail risk, a sharp jump from 28% last month, surpassing the "second wave of inflation" (26%) as the top concern. At the same time, 52% of the respondents believe that AI stocks are currently in the "prosperity" stage, and another 23% believe that they have entered the "hyper" stage. As concerns about the AI bubble continue to rise, the Federal Reserve is unlikely to rashly raise interest rates out of consideration to guard against financial risks and avoid a repeat of the dot-com bubble burst. Against this background, disagreements within the Federal Reserve over U.S. inflation trends and interest rate policies will continue, and are clearly divided into three camps: One is the dovish camp represented by Williams. New York Fed President John Williams said on July 15 that although AI investment demand has put upward pressure on inflation, the.
In response to this historical problem, Warsh reiterated his hope to reduce the size of the balance sheet at the European Central Bank's annual central bank forum held in Sintra, Portugal, on July 1. He said that the current balance sheet size of approximately US$6.7 trillion is much higher than the pre-epidemic level. This huge volume has been accumulated over approximately 18 years, and its nature is close to that of a fiscal tool. In terms of communication strategy, at a Senate hearing in April, Warsh emphasized that he hoped for an institutional change in the Fed's communication strategy. He prefers to maintain "strategic ambiguity," questions the value of regular post-meeting news conferences and advocates reducing the frequency of public speeches by Fed officials. Since Warsh's first press conference after the interest rate meeting in June, the change in the Fed's communication strategy has been first seen: that month, the length of the statement at the interest rate meeting was greatly reduced; Warsh not only refused to provide interest rate forecasts with other Fed officials, but also refused to disclose policy preferences at the post-meeting press conference, resulting in a significantly shortened press conference. He made it clear in his debut that he hopes the market will tell the Fed what interest rates should be based on economic data, not the other way around. Since then, Warsh further set the tone at the Sintra Forum that the Fed will no longer provide forward guidance on interest rates and will instead rely entirely on the latest economic data for meeting-by-meeting decisions. This marks that the Fed's communication framework has shifted from the "forward guidance era" to a "data-driven model." Warsh took office at a time when concerns were growing about Trump interfering in the Fed's decision-making and undermining the independence of monetary policy. Therefore, whether the Federal Reserve's independence can be maintained has become the first test that Warsh will face after taking office. At the aforementioned Senate hearing, Warsh made it clear that Trump had never asked him to commit to any specific interest rate decision, stressing that "I would never do that." This stance continues the Fed chairman's tradition of defending independence. But unlike the Powell era, which deliberately kept a clear distance from the White House, Warsh adopted a new model of high-frequency contact but maintaining independent decision-making. Regarding the economic effects of technological progress, Warsh showed similar views to Greenspan's views on the "new economy" in the 1990s. As early as when he was running for chairman of the Federal Reserve, he described an optimistic vision of artificial intelligence (AI) reshaping the economy, believing that the productivity improvements brought about by AI applications would eventually reduce production costs and increase aggregate supply, thus putting downward pressure on inflation. Strategically, this is the core basis for his advocacy of future interest rate cuts; but tactically, he will still consolidate his anti-inflation credibility through a short-term hawkish stance. To support his judgment, Warsh established the "Productivity and Employment Working Group" immediately after taking office to assess the impact of new general-purpose technologies, including AI, on the economy. Taken together, Warsh's policy propositions are similar to those of previous Fed chairs, but also show significant differences in the times. He has repeatedly emphasized the need to return to the core responsibility of the Federal Reserve: maintaining price stability, and regards this as the "first principle" of monetary policy. At a Senate hearing in April, he even stated that he planned to issue guidelines to regional fed banks to prohibit them from participating in over-the-top issues such as climate change advocacy, lobbying for state constitutional amendments, and racial equity policies. This series of statements is essentially a comprehensive reflection and reconstruction of the Fed’s policy paradigm and functional boundaries over the past decade or so. This systemic reform intention was implemented in Wash's first performance after taking office. Warsh announced the establishment of five task forces, focusing on key areas such as Fed communications, balance sheet policy, data use, productivity and employment, and inflation framework. The reform of the Federal Reserve is far away and cannot quench the near thirst. After announcing the establishment of five working groups in June, the Federal Reserve appointed more than a dozen experts to lead the five working groups on July 9. The expert panel includes experienced economists, business leaders and former central bankers, marking the beginning of the implementation phase of Warsh's plan to reshape the Federal Reserve. According to the deployment, the five working groups will operate independently with the support of Federal Reserve staff, follow an evidence-based approach, and submit rigorous research results to the Federal Open Market Committee (FOMC). The relevant work is expected to be completed before the end of the year. However, although relevant research results are expected to provide important reference for Wash's policy proposals, there are still many uncertainties about whether they can be successfully implemented in the end, and the market should not expect too high expectations for the effectiveness of the reform.
First, Warsh’s policy proposition may not be fully supported by the working group’s research findings. The leaders of the five working groups span multiple fields and have certain differences in their views. While this diversity helps reduce outside doubts about the research results, it also means that relevant reports may run counter to Warsh’s policy advocacy. Take the Inflation Framework Group as an example. According to the analysis of the British "Economist" article, the positions of its three leaders are different: Nobel Prize winner Thomas Sargent is a staunch supporter of the inflation target; former Bank for International Settlements (BIS) economic advisor William White believes that the target system not only pushes up global debt, but also amplifies the cyclical fluctuations of financial "boom and bust"; while Greg Mankiw, professor of economics at Harvard University and former chairman of the Council of Economic Advisers, supports the target system, but opposes the "false precision" target of 2%. Even on the balance sheet policy, where Wash has always been clear, the opinions of those responsible are divided. Among them, Jeremy Stein, professor of economics at Harvard University and former governor of the Federal Reserve, argued in a paper at the Jackson Hole Conference that the Federal Reserve's maintenance of a relatively large balance sheet is conducive to financial stability, because abundant reserves reduce the dependence of financial intermediaries on short-term highly volatile financing instruments, fundamentally reducing the accumulation of run risks. Raghuram Rajan, a professor at the University of Chicago and former governor of the Bank of India, warned that the QE policy is asymmetrical and that shrinking the balance sheet is more difficult than expanding it. He pointed out that the reversal of QE is not smooth sailing, but will produce a one-way "ratchet effect": when the Federal Reserve injects large amounts of funds into the financial system, the lending habits formed by banks will not disappear with the policy reversal. This makes the financial system (especially smaller, undercapitalized banks) dependent on the large-scale funds injected by the Fed. Once the policy changes and funds are withdrawn, the financial system will face numerous risks. Secondly, the Federal Reserve is not a "one-man shop". Monetary policy is formulated jointly by 12 voting members, not by the chairman alone. In fact, before Warsh officially took office as Fed Chairman, differences within the Fed were already prominent. For example, at the April interest rate meeting, the number of dissenting votes hit a new high since 1992. Although Warsh helped build internal consensus by establishing five working groups to review the Fed's core functions, the authority of the working groups was limited to providing advisory recommendations and did not have decision-making power. Whether relevant research results and policy propositions can ultimately be adopted and implemented still depends on whether Warsh can win the support of Fed governors and regional Fed presidents. This obviously poses a severe test to its political wisdom and coordination ability. Interest rate policy may remain on hold At the beginning of this year, the market was still trading in expectations for a rate cut by the Federal Reserve, with two rate cuts widely expected during the year. However, with the outbreak of geopolitical conflicts in the Middle East at the end of February, expectations for interest rate cuts have significantly weakened. The Chicago Mercantile Exchange (CME) FedWatch Tool also shows that the current market expectation is that the probability of the Fed cutting interest rates this year and next is close to zero. Looking forward to the second half of the year, as the AI investment boom continues, the situation in the Middle East changes, and the impact of tariff policies, the risk of rising inflation in the United States remains prominent, restricting the Federal Reserve's interest rate cut process. First, the inflationary effect of AI appears before the deflationary effect. Warsh's core basis for advocating for interest rate cuts is that AI can increase productivity and bring about a deflationary effect, allowing the economy to achieve rapid growth without triggering inflation. But the reality is that the inflationary effects brought about by artificial intelligence have appeared before the deflationary effects this year. Prices of chips, high-tech equipment, software and utilities have risen sharply, driven by increased capital spending on artificial intelligence infrastructure. On July 15, Federal Reserve Board Governor Lisa Cook pointed out that artificial intelligence construction shows no signs of slowing down. Companies have announced more than 1.5 trillion US dollars in data center construction plans, but only a small part has been implemented. There are huge investment needs in data centers alone, and other AI-related capital expenditures are also likely to grow significantly in the coming years.
Second, geopolitical conflicts in the Middle East have recurred, driving up oil prices. Since the ceasefire agreement broke down on July 8, the US military has launched continuous air strikes against Iran. On July 23, Trump stated that he was "seriously considering" restarting large-scale combat operations against Iran. On the same day, the Islamic Revolutionary Guard Corps announced a "complete blockade" of the Strait of Hormuz. Affected by this, Brent crude oil futures prices broke through the $100 per barrel mark again on July 23. Third, uncertainty about U.S. trade policy still exists. In February this year, the U.S. Supreme Court ruled that reciprocal tariffs based on the International Emergency Economic Powers Act (IEEPA) were invalid. Since then, the U.S. government has imposed a 10% temporary tariff on global trading partners in accordance with Section 122 of the Trade Act of 1974. On July 23, the United States invoked Article 301 of the 1974 Trade Act and imposed additional tariffs of 10% to 12.5% on 60 economies on the grounds of "inadequate enforcement of forced labor". The tariffs officially took effect the next day to replace the expired Article 122 tariffs. But at the same time, recent U.S. inflation and labor market data also support the Federal Reserve to take more prudent actions, and there is currently no urgency to raise interest rates. First, U.S. inflation expectations are well anchored and actual inflation pressure has eased. From an expected perspective, the five-year breakeven inflation rate implied by the U.S. Inflation-Protected Securities (TIPS) market is 2.3%, which is basically stable around the 2% policy target. Judging from actual data, the year-on-year growth rate of U.S. CPI in June dropped from the previous 4.3% to 3.5%, and the core CPI growth rate dropped from 2.9% to 2.6%, both hitting new lows in the past three months. Market institutions predict that the core PCE growth rate in June, which will be released at the end of July, may also fall. Second, inflation data may experience a technical downward revision. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce plans to adjust the statistical method of the PCE price index in September, mainly revising the statistical caliber of investment management services, computer software and legal services. Market agencies estimate that this move will technically lower the core PCE inflation reading by about 0.1 to 0.3 percentage points, which may help support the dovish stance. Third, the labor market continues to cool. In June, the number of new non-farm jobs in the United States was only 57,000, significantly lower than market expectations of 115,000, and the total number of new jobs in the previous two months was revised down to 74,000. That month, the unemployment rate fell by 0.1 percentage points from the previous month to 4.2%, but the labor force participation rate fell by 0.3 percentage points to 61.5%, a new low since April 2021; the ratio of job vacancies to the number of unemployed people was close to 1:1, far lower than the 2:1 peak in 2022. Fourth, the financial market poses obvious constraints on interest rate hikes. The Bank of America Global Fund Manager Survey (FMS) in July showed that 45% of respondents listed the "AI bubble" as the current biggest tail risk, a sharp jump from 28% last month, surpassing the "second wave of inflation" (26%) as the top concern. At the same time, 52% of the respondents believe that AI stocks are currently in the "prosperity" stage, and another 23% believe that they have entered the "hyper" stage. As concerns about the AI bubble continue to rise, the Federal Reserve is unlikely to rashly raise interest rates out of consideration to guard against financial risks and avoid a repeat of the dot-com bubble burst. Against this background, disagreements within the Federal Reserve over U.S. inflation trends and interest rate policies will continue, and are clearly divided into three camps: One is the dovish camp represented by Williams. New York Fed President John Williams said on July 15 that although AI investment demand has put upward pressure on inflation, the.