Federal Reserve Chair Kevin Warsh said Friday at the Jackson Hole Economic Policy Symposium that inflation is still too high and that the central bank may have to raise interest rates in the coming months if price pressures do not ease. The people who live with the fallout don’t get a vote in that room. The board does.
Warsh said recent U.S. reports show inflation has cooled a bit, but "they do not tell me that underlying trends have meaningfully improved." He added, "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 the language of technocrats deciding how much pain the rest of society should absorb while they protect the Fed’s credibility.
Who Has the Power
Warsh did not say a rate hike is imminent, and he did not spell out how the Fed would handle interest rates at its next meeting, set for Sept. 15-16. He reiterated that he does not want to provide what analysts call "forward guidance" about whether the Fed will hike, cut or hold rates, saying that such guidance limits the Fed's flexibility. He also said short-term interest rates are the Fed's "predominant tool" to combat higher prices. Flexibility for them means uncertainty for everyone else.
In his first high-profile speech at the Fed's annual conference in Jackson Hole, Wyoming, Warsh said inflation data "are more concerning" than trends in the job market, where unemployment is low. He argued that inflation is unlikely to return to the Fed's 2% target on its own. Warsh said the central bank is using the same gauge it has long followed to measure inflation and recommitted to the 2% personal consumption expenditures target, calling it a "firm, fixed target." The target stays fixed. The pressure moves downward.
Warsh said elevated prices needed to be the Fed's main focus and described financial conditions as not being broadly restrictive, a shift from his July news conference, when he said they were uneven. He said he was responding to criticism that his July remarks had left markets uncertain about the path of interest rates. "We can be held accountable for delivering on our remit — the only true test of our credibility," Warsh said. Accountability, in this setup, runs upward to markets and boardrooms, not outward to the people paying the bills.
Who Gets Crushed
Warsh also gave a detailed reading of inflation measures. He said 54% of components of PCE had been above 3% annualized inflation in the past 12 months, while 49% were above 3% in the past six months. He said those figures were lower than during the pandemic inflation surge but still above the long-term trend. He also cited the consumer price index, which he said is running at 3.4%. "None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target," he said.
Warsh said a good majority of his colleagues and he thought the wiser course in July was to await new information in the intermeeting period. He also said the Fed is watching developments in artificial intelligence closely, but a Fed task force examining AI use and economic impact was "encouraging" and so far had "no bearing on decisions we make in the current policy conjuncture." He said there was no signal at Jackson Hole that balance sheet cuts were coming. The machinery keeps humming. The people below it keep waiting.
The speech came as questions swirled around Wall Street about whether Warsh was sufficiently focused on fighting inflation. Warsh replaced Jerome Powell in late May after Powell's term ended. President Donald Trump, who appointed Warsh, has continued to call for lower rates and 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 Cook would enable 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.
What They're Calling Stability
Warsh's remarks moved markets. The U.S. stock market held steady after the speech, but bond traders increased expectations for higher short-term rates. The yield on the two-year Treasury, which closely tracks expectations for the federal funds rate, moved from 4.22% to 4.30%. Longer-term yields on 10-year and 30-year Treasuries were mostly flat. Wall Street investors now see the chances of a rate hike at the Fed's Sept. 15-16 meeting as basically a coin flip, according to futures pricing tracked by CME FedWatch, up from about one-third before Warsh spoke.
Jon Faust, an economist at Johns Hopkins and a former adviser to Powell, said Warsh succeeded in conveying a tougher approach on inflation while avoiding the kind of detailed guidance he has disparaged. "He found a way to convey that if necessary he would support raising rates, which is one thing people were concerned about," Faust said. Michael Strain, director of economic policy studies at the American Enterprise Institute, said Warsh has talked tough on inflation before without hiking the Fed's key rate and that Friday's remarks did not provide any clearer guidance on the timing of any Fed moves.
Warsh also said that in the past year, more than half of goods and services tracked by the government have seen price increases of 3% or higher, down from the pandemic peak but still well above the roughly one-third that saw such increases in the two decades before the pandemic. He said inflation cooled in June and July after spiking in May from soaring gas prices, but it remains above the central bank's target. He also said the rate on the 30-year Treasury bond reached the highest level in 19 years last week, prompting an unusual effort by Treasury Secretary Scott Bessent to buy back bonds and push yields lower. The state and its financial managers keep adjusting the levers. Ordinary people get the bill either way.