Federal Reserve Chair Kevin Warsh said on Friday that inflation is still too high and suggested that the central bank may have to raise interest rates in the coming months to reduce it. His remarks marked a clearer signal than he had previously given about his economic outlook. Warsh emphasized that the central bank must be confident that underlying inflation is moving toward its 2% target at a clear and sufficient pace.
The comments reassured Wall Street that fighting inflation remains the Fed’s main priority, according to Fortune. He did not say a rate increase is imminent, but he dismissed the idea that inflation no longer poses a threat. Warsh pointed to recent data showing inflation remains stubbornly above the central bank’s 2% goal.
He took over from Jerome Powell in late May after his predecessor’s term ended. Following the speech, stock markets held steady, but bond yields rose, indicating that investors expect higher short-term rates. Thirty-year Treasury yields climbed to about 30%, a sign that investors anticipate more aggressive Fed action. Longer-term yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors are not yet worried about long-term rate increases.
Economist Jon Faust from Johns Hopkins said Warsh successfully communicated a harder stance on inflation without offering the kind of detailed guidance that he has previously criticized. Faust noted that Warsh managed to convey support for rate hikes if necessary, which had been a concern among investors.
Michael Strain of the American Enterprise Institute said that while Warsh has spoken tough on inflation before, he did not raise rates in those cases. He added that Warsh’s remarks didn’t provide clear timing for any future Fed actions.
Warsh faces high stakes with his speech as Wall Street questions his focus on inflation. Rising bond yields could raise borrowing costs for the government and others in the economy. Warsh has said he doesn’t want to offer what analysts call forward guidance on future rate decisions. He believes such guidance limits the Fed’s flexibility by locking it into a specific policy path.
Some economists argue that he could express more about his views on policy without revealing future moves. Warsh reiterated that he is skeptical of providing forward guidance or outlining a broad approach to interest-rate policy. He did suggest that current interest rates are not yet restricting economic activity. He pointed to strong business investment in AI equipment and infrastructure, as well as robust consumer spending.
As a general rule, interest rates often need to be high enough to limit borrowing and spending to cool inflation. The Fed is scheduled to meet September 15-16, and Warsh’s remarks do not necessarily signal that it will raise rates then. However, his speech suggested that current rates may not be high enough to bring inflation down to the Fed’s 2% target. Warsh said inflation data are more concerning than trends in the job market, where unemployment remains low. He also argued that inflation is unlikely to return to target levels on its own.
Warsh noted that in the past year, 54% of goods and services tracked by the government saw price increases of 3% or higher. While this is down from the pandemic peak, it remains well above the 32% seen in the two decades before the pandemic.
Inflation cooled slightly in June and July after a sharp rise in May due to soaring gas prices, but it remains above the Fed’s target. It was 3.7% in July.
Warsh also sought to clarify some confusion that arose after his remarks at a July 29 news conference. He specified that short-term interest rates are the main tool the Fed can use to lower inflation.
Previous Fed chairs have often used Jackson Hole speeches to address broader questions about policy or signal upcoming changes in approach. Powell, for example, at the 2023 meeting, signaled that the Fed would continue sharply raising rates to fight runaway prices and acknowledged that such steps would bring pain to consumers and businesses.
Wall Street investors now see the chance of a rate hike at the upcoming Sept. 15-16 meeting as basically a coin flip, according to futures pricing tracked by CME FedWatch. This is up from about one-third before Warsh spoke.
Questions about Warsh’s approach have intensified amid President Donald Trump’s calls for lower interest rates. While Trump has continued to defend Warsh, whom he appointed, the president has criticized other Fed officials for supporting higher rates. Trump has also renewed efforts to remove Fed Governor Lisa Cook, who was appointed by former President Joe Biden. Replacing her would allow Trump to appoint a majority of the seven-member board.
Trump tried to fire her last year but was temporarily blocked by the Supreme Court.
At the Jackson Hole conference, Warsh said that although inflation is still elevated, it’s not yet clear that urgent action is needed to address rising prices, according to a report from NBC News. His speech was eagerly awaited after a difficult start to his tenure. Market observers had been concerned that he downplayed the risk of inflation rising further. There were also calls for an interest rate hike from economists, including some within the Fed.
Warsh did not say how the Fed would react if prices keep rising at rates above the target of 2%. But he emphasized that rate hikes are the primary tool for tackling inflation. He said the central bank must be confident that underlying inflation is moving toward its objective clearly and at sufficient speed.
Following his speech, the odds of a rate hike next month increased. Warsh said that if markets rely materially on Fed guidance and the Fed relies on market prices, both sides become more likely to miss new developments and make policy errors.
Federal Reserve Chair Kevin Warsh wants bond investors to focus on economic data rather than central-bank commentary, Crypto Briefing reported. However, his appearances continue to move Treasury markets, Bloomberg reported. The three largest daily moves in the US Treasury yield curve since Warsh became chair followed his appearances, including press conferences in June and July and his speech at Jackson Hole.
On Friday, the gap between two-year and 30-year yields narrowed by 10 basis points as traders increased bets on rate hikes. Warsh warned that inflation is not meaningfully slowing and said policymakers still have work to do. He described the feedback loop between markets and Fed officials as a hall-of-mirrors problem. Warsh has urged investors to focus on economic data rather than trying to anticipate policymakers’ remarks.
The market reacted differently to his July appearance, when the yield curve steepened after investors said he had not explained why the Fed left rates unchanged. Fixed-income managers warned that reduced Fed communication could lead to further volatility.
IMAGE: Kevin Warsh, member of the Board of Governors of the Federal Reserve.. Photo: Federal Reserve / Wikimedia, taken 2006-00-00, Public domain