The Fed "has a lot of work ahead" if inflation doesn't come down quickly — Warsh

Inflation remains too high, and it must remain a top priority for the Federal Reserve, said Federal Reserve Chairman Kevin Warsh in his first speech in that role at a symposium in Jackson Hole, Wyoming. The full text of the speech, titled “In Our Time,” is available on the Fed’s website.

“Here’s my standard: we must be confident that core inflation is moving toward our goal—clearly and at a sufficient pace. Otherwise, we have a lot of work ahead of us. This is our task... our mandate... and our commitment, which we must fulfill,” the Fed chair said.

In his remarks, Warsh came as close as possible to acknowledging that raising interest rates may be necessary to ease price pressures, Reuters notes.

According to the Fed chair, the price component of the central bank’s dual mandate is a greater cause for concern than the labor market. Specifically, the Personal Consumption Expenditures (PCE) index —the Fed’s preferred measure of inflation—rose 3.7% year-over-year in July, slightly exceeding economists’ expectations. The Consumer Price Index (CPI) shows a similar trend. “None of these metrics is perfect, but they all point to one thing: inflation remains above our 2% target. Therefore, the Fed’s primary focus right now should be on prices,” Warsh noted.

The Fed chair noted that overall inflation figures have fallen significantly from their 2022 peaks, but progress over the past two years has been modest. The latest macroeconomic data do not suggest that underlying trends have improved significantly, according to Warsh. At the same time, he did not specify any timeline for a possible interest rate hike and, on the contrary, emphasized that his remarks should not be taken as a “forecast or a guide to action.”

According to Reuters, hints of a possible interest rate hike in the event of sustained inflation were also included in the assessment of the state of the economy. The Fed chair described the U.S. economy as resilient, noting an acceleration in growth and a “rapid” rise in capital expenditures, which he estimated had increased by 9% over the past four quarters. Monetary policy is not currently hindering economic growth, Warsh believes: “Some sectors, such as real estate and agriculture, are showing signs of strain. But, overall, it would be an exaggeration on my part to describe broad financial conditions as restrictive,” he noted.

Major U.S. indices fell following Warsh’s remarks but then recovered their losses and resumed their upward trend. For example, the broad-market S&P 500 index gained 0.5% after earlier falling 0.2%. The tech-heavy Nasdaq Composite, which had fallen as much as 0.4% at its low, rose 0.6%. Meanwhile, the blue-chip Dow Jones Industrial Average gained 0.4%.

Yields on two-year U.S. Treasury bills rose by 9 basis points to 4.32% amid the Fed chair’s remarks, while yields on 30-year bonds fell by 2 basis points to 5.17%, according to Bloomberg. Such movements—known as yield curve flattening—reflect expectations that the Fed will have to raise short-term rates, which will eventually cool inflation and limit the cost of long-term borrowing, Bloomberg notes. Bond yields rise when their prices fall.

This article was AI-translated and verified by a human editor