Fed Chair Warsh warns inflation is still too high, opening door to rate hikes

With the labor market stable, inflation too high, and little in financial conditions to indicate that the Fed's policy rate is restraining it, he said, "The Fed's predominant focus right now should be on prices."

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He did not directly address recent market interventions by U.S. Treasury Secretary Scott Bessent, which have put downward pressure on long-term Treasury yields.

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While much of Warsh's 16-page address focused on large issues, like the influence of artificial intelligence, that he feels will be critical in the long run, it also included some key acknowledgements — including that "short-term interest rates are the predominant tool to achieve the dual mandate."

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Warsh did not suggest a timeline for rate hikes, and explicitly said his remarks should not be taken as "forward guidance" or even as the more explicit "reaction function" investors and Fed analysts have suggested he provide — neither of which he feels would be appropriate or possible to accurately provide.

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But they do amount to his most detailed comments yet on where the Fed stands in its efforts to return inflation to its 2% target after more than five years above it, and on how, exactly, he is making sense of the data that shows a "stable" labor market, resilient economic growth, fast-rising business investment, and financial conditions in which he is "hard-pressed" to see any signs of restrictiveness.

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With just one more inflation report expected before the September 15-16 meeting, it is unclear if that wait will be over very soon.

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After his speech, Warsh took a stroll in the rain in the company of his counterparts from the central banks of Canada and England, something that any Fed chief might do.

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He also said that not only does the economy appear resilient, but that given current market interest rates and a Fed short-term policy rate that has remained unchanged in the 3.50%-3.75% range since December, "credit and loan markets are showing few signs of policy restraint," comments that could lay the groundwork for arguments in favor of a rate hike if inflation persists.

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There was sentiment at the meeting last month to tighten policy, with three policymakers dissenting from the decision to leave the policy rate unchanged.

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Key unemployment, job growth and consumer inflation data for August will be released early next month.

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His words could help allay worries in financial markets, where global investors have been pushing up longer-term rates out of concern that elevated consumer prices will persist.

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Warsh, who took the helm of the central bank in May, has been under growing pressure to take a firmer stance on the Fed's readiness to fight inflation.

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"Certain sectors — like housing and agriculture — are showing strains," he said, but added that rates overall did not seem to be dragging down economic activity.

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The speech, his first official address in his new role, diverges from his early practice of providing almost no opinion on the state of the U.S. economy, although he still did not employ typical central banker speak in signaling when an interest rate hike might come.

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Powell, who remains a Fed board member, was a frequent target of the president's anger for resisting rate cuts.

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While stopping short of explicitly saying the Fed could raise its benchmark interest rate, Warsh also signaled that policymakers are prepared to act if inflationary pressures don't subside.

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Although inflation remains hot, Warsh said he is "impressed by the overall performance of the economy," touting measures such as the nation's unemployment rate, which sat at 4.1% in July.

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While Warsh has sidestepped questions about the trajectory of interest rates, several Fed officials have underscored their openness to a rate hike.

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Economists and Wall Street analysts have looked for a clear signal from Warsh on how he thinks the Fed should respond to stubborn inflation.

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Federal Reserve Chair Kevin Warsh on Friday expressed concern that inflation remained too high, marking his first comments at the central bank's annual symposium in Jackson Hole, Wyoming, as he called for a "quieter" central bank.

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Warsh also called for a "quieter" Fed, saying the central bank "plays an essential role in the economy and the markets" and that its "tools are powerful" while "market participants will always try to anticipate what we do next."

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Inflation steadily increased through the U.S.-Iran conflict, with consumer prices rising at their fastest rate in years in May before cooling by July.

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No decision about scheduling changes was made during the meeting, but Warsh requested input from other officials.

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Many Fed officials have said interest rate hikes would "likely be necessary" if inflation did not decline, and some policymakers indicated their inflation outlooks were "highly uncertain" as a conflict in the Middle East "clouded" projections.

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Central bank officials have, for months, expressed concerns that inflation has yet to show improvements, saying in April they believed there was an "increased risk" that inflation would take longer to fall below the Fed's 2% goal than previously expected.

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The Fed won't meet to set rates until mid-September, and Warsh didn't explicitly say how the central bank would handle interest rates.

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Warsh's first pair of news conferences as Fed chairman left many in the markets uncertain about where he stood on the path of interest rates, prompting bond traders to sell off long-term debt to account for the uncertainty.

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He said elevated prices needed to be the Fed's main focus and described financial conditions as not being broadly restrictive, a change from his July news conference, when he said they were uneven.

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Some economists interpreted Warsh's muddled answers to reporters' questions last month as saying he might want to change that target — even as inflation remains elevated.

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Warsh also referred to another gauge of inflation, the consumer price index, which is running at 3.4%.

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One of the harshest focused on Warsh's description of how he sees the Fed's core mission of assessing and responding to inflation.

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Warsh also addressed another critique of his performance in July — that he wouldn't turn quickly to interest rates to fight inflation.

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In the past, he had said advances in AI might be a reason to reduce interest rates.

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He had also said cutting the Fed's balance sheet would be a reason to lower interest rates.

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The two men have spoken directly since Warsh became chairman, breaking with a tradition that sees contact between the Fed and the administration channeled through the Treasury secretary.

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Warsh is now indicating that considerations of AI don't have much to do with current policymaking. And there was no signal at Jackson Hole that balance sheet cuts were coming.

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Warsh is now indicating that considerations of AI don't have much to do with current policymaking. And there was no signal at Jackson Hole that balance sheet cuts were coming.

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The Jackson Hole speech won't eliminate worries about Warsh's time at the Fed helm. Trump has continued to meddle with the Fed, including reinstating an effort on weak evidence to fire Governor Lisa Cook. And Warsh hasn't yet delivered concrete action against inflation.

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Warsh didn't address Trump at Jackson Hole. But his reading of the economy as showing signs of elevated price concerns puts him clearly at odds with the president.

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