The US Federal Reserve will “have work to do” if policymakers fail to gain sufficient confidence that inflation is moving towards its 2% target, Fed Chair Kevin Warsh said on Friday, leaving the possibility of an interest rate increase more clearly open than before as the central bank seeks to contain inflationary pressures.
“That is my criterion: We have to be confident that underlying inflation is moving towards our target, clearly and at a sufficient pace. Otherwise, we have work to do. That is our job... our mandate... and the responsibility we have to uphold,” Warsh said in his keynote address at the Fed’s annual economic symposium in Jackson Hole, Wyoming.
'Clear signals'
His remarks increased market expectations of an interest rate rise next month, which had previously been considered less likely.
“We are approaching six years in which we have been above the target” for inflation, said Patrick Harker, former president of the Federal Reserve Bank of Philadelphia. “You cannot keep saying this is our job and then not act,” he added.
Although much of Warsh’s 16-page speech focused on longer-term issues, including the impact of artificial intelligence, he stressed that “short-term interest rates are the primary tool for achieving the dual mandate” of the Fed.
Warsh also said the conclusions of five working groups he had established to examine long-term issues “will come later and will not affect the decisions we make in the current monetary policy environment”.
He did not directly refer to recent interventions by US Treasury Secretary Scott Bessent, but said the Fed “needs clear signals from markets, as unfiltered as possible” to determine the appropriate monetary policy.
Inflation remains persistent
Warsh’s comments on inflation were among his clearest to date, as the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, remained at 3.7% year-on-year in July.
“Progress over the past two years has been limited,” Warsh said, adding that recent data “do not show me that underlying trends have materially improved”.
Around half of the goods and services included in the PCE basket are rising at an annual rate of more than 3%. That is lower than during the pandemic-driven inflation surge, but remains above pre-pandemic levels.
Interest-rate futures now price in roughly a 55% probability of a rate increase at the Fed’s 15-16 September meeting, up from around 40% before Warsh’s speech.
No timeframe
Warsh did not give a timeframe for any potential rate increases and stressed that his comments should not be interpreted as “forward guidance” on future policy.
He nevertheless underlined that inflation remains above the Fed’s 2% target and said “the primary focus of the Fed right now should be on prices”.
The Fed chair said inflation expectations remained stable for the time being but would need to be closely monitored.
“It is the Fed’s job to make sure inflation expectations do not become unanchored,” he said.
At the same time, Warsh said the economy appeared resilient and that, with current market interest rates and the Fed’s benchmark rate remaining at 3.50%-3.75% since December, credit and lending markets showed little evidence of restrictive monetary policy.
Key US data on unemployment, job creation and inflation for August are expected to be released in early September.
