Federal Reserve chairman Kevin Warsh on Friday hinted the central bank could raise interest rates if inflation continues to run above target.
In his inaugural Jackson Hole keynote address as Fed chair, Mr Warsh said that although recent inflation measures were better than expected, “they do not tell me that underlying trends have meaningfully improved”.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job,” he said.
Mr Warsh acknowledged some sectors such as housing and agriculture are showing strains, noting that he would be “hard pressed to describe broad financial conditions as restrictive”.
Markets took Mr Warsh's remarks to suggest that the Fed might not be done fighting inflation. The two-year Treasury yield, which closely follows Fed decisions, jumped more than nine basis points to 4.325 per cent after his speech, while yields on the 10-year climbed more than two basis points to 4.7 per cent.
Bond markets entered Friday’s address spooked, with the continuing Iran war fuelling inflation fears while the US national debt topped $40 trillion for the first time. Treasury Secretary Scott Bessent last week attempted to steady some of those jitters by announcing plans to at least double the size of the department’s buyback programme from $2 billion to $4 billion.
Mr Warsh did not directly mention the Treasury Department's accelerated buyback programme, although he said the Fed needs “clear market signals, as unfiltered as possible”.
Data released last week showed PCE inflation holding firm in June, rising 3.7 per cent on an annual basis. Core inflation, which strips away food and energy, rose 3.3 per cent year-on-year, in line with expectations.
Mr Warsh said that with conditions in the labour market consistent with full employment, the Fed's focus “should be on prices”.
The Fed voted nine to three in favour of holding interest rates steady at roughly 3.6 per cent in July. (The UAE Central Bank, which follows Fed decisions because of the country’s currency peg, also left rates unchanged.)
Cleveland Fed president Beth Hammack – who voted in favour of raising interest rates last month – earlier this week said the Fed needs to act now to clamp down on inflation. Kansas City Fed president Jeffrey Schmid and Boston Fed president Susan Collins, who are not voting members on the rate-setting committee, also advocated for raising interest rates.
Warsh pushes for quieter Fed
Jackson Hole is a tent-pole event on the Federal Reserve’s calendar, with the chair’s keynote address typically seen as an opportunity to reset the direction of monetary policy. Mr Warsh’s predecessor, Jerome Powell, used it in 2022 to preview higher-for-longer interest rates, while Janet Yellen in 2014 cautioned against the post-recession labour market recovery.
Mr Warsh's speech appeared to address some of the concerns analysts and economists have about his stripped-down communications strategy. The former Fed governor has long said that excessive Fed communication injects uncertainty into financial markets.
While the speech offered some hints about his appetite for high inflation, he reiterated his support for a less talkative Fed and paring back forward guidance, a communications tool the central bank uses to signal potential future policy moves to markets.
“The Fed plays an essential role in the economy and the markets. And our tools are powerful,” he said.
“We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”
He also maintained his commitment to the Fed's long-term 2 per cent inflation target.
“There should be no misunderstanding: The Fed's price-stability objective of 2 per cent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target,” he said.
