Federal Reserve Chair Kevin Warsh said on August 29 that the U.S. central bank would have “more work to do” unless policymakers are confident that underlying inflation is returning to the 2% target. Speaking at the Jackson Hole economic symposium in Wyoming, Warsh emphasized that current financial conditions do not appear tight enough, marking his closest acknowledgment yet of the possibility that interest rates may need to rise to ease price pressures.
“My test is: We must be confident that underlying inflation is moving toward target clearly and at a sufficiently fast pace,” Warsh said. However, he did not provide a specific timeline for a rate hike and stressed that his comments should not be interpreted as “forward guidance” on policy.
Still, the prospect of a rate increase is becoming more tangible. According to data from CME Group’s FedWatch tool, markets assign a 57.4% probability that the Fed will raise rates by 25 basis points at its meeting in mid-September. Warsh asserted: “Short-term interest rates are the primary tool to achieve the dual mandate. The Fed’s job is to ensure inflation expectations do not become unanchored.”
Regarding the Personal Consumption Expenditures (PCE) price index – the Fed’s preferred inflation gauge – the figure stood at 3.7% year-over-year as of July. Warsh remarked: “Progress over the past two years has been modest” and current data “does not show that underlying trends have improved significantly.” He also noted that PCE inflation is running at 3%, much higher than in the pre-pandemic period.
Analysts at research firm Capital Economics assessed Warsh’s speech as “carrying a clearer and somewhat more hawkish message than his previous press conference,” adding that it “opens the door to a rate hike earlier than our current forecast of December, if upcoming price data remains firm.”
Beyond interest rates, Warsh’s speech also touched on broader issues, such as the role of artificial intelligence in the economy. He said recommendations from five working groups established by the Fed would be released later to address “future policy challenges.”
