In his first congressional testimony since taking office in May, Federal Reserve Chair Kevin Warsh opened the door to the most significant review of US monetary policy in nearly two decades. He told lawmakers that newly formed task forces would examine the way the central bank manages interest rates and its $6.8 trillion balance sheet, with a six-month deadline to deliver findings. The announcement immediately shifted the terms of debate in Washington, where the post-2008 framework of abundant bank reserves and large-scale asset purchases had long been treated as permanent.

Warsh made clear that any changes would be gradual and transparent, ruling out a wholesale return to the pre-crisis scarce-reserves model. He signalled a preference for relying almost exclusively on interest rates in normal times, reserving balance-sheet interventions for emergencies. The review will weigh the merits and drawbacks of the current system, under which the central bank has used its balance sheet aggressively not only during crises but also as a routine policy tool.

On inflation, the Fed chair struck a dual note. He expressed dissatisfaction with the metrics used to gauge underlying price pressures, calling them 'imperfect,' and reaffirmed that committee members 'do not tolerate persistently elevated inflation.' Yet he also suggested the current price surge would not last, describing it as a supply shock that could ease as capacity responds. He dismissed the significance of a single favourable consumer price index reading for June, cautioning against premature declarations of victory. The message reinforced market expectations that the Fed would hold rates steady this year, though the risk of further tightening remained.

Warsh devoted considerable attention to the investment boom driven by artificial intelligence, framing it as a structural supply-side force. Total equipment investment rose about 8 per cent in the year to the first quarter, while spending on high-end technology jumped roughly 25 per cent, much of it linked to data-centre construction and AI-related software. He argued that such a supply shock need not be inflationary, because output can expand to meet demand—a contrast with the supply destruction caused by external conflicts.

Separately, the Bank of Canada held its benchmark rate at 2.25 per cent, noting that growth was gaining momentum and long-term inflation expectations remained well anchored. The decision underscored broader central-bank caution. The next factual milestone for the Fed will be the task forces' reports, due within six months, which could reshape the operational backbone of US monetary policy for years to come.