Fed Chair Warsh Signals Possible Rate Hike as Inflation Remains Stubborn

Warsh Warns Inflation Still Too High

Federal Reserve Chair Kevin Warsh delivered his first major speech at the annual Jackson Hole Economic Policy Symposium on Friday, signaling that the central bank may need to raise interest rates in the coming months if inflation does not cool further.

Warsh acknowledged that recent S. reports show inflation has cooled a bit, but said those readings do not tell him that "underlying trends have meaningfully improved." He emphasized the Fed's mandate, stating, "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Latest figures show prices rose 4% in the year to July, above the Fed's 2% target. Another inflation measure closely watched by the Fed, the personal consumption expenditures price index, is running at 7%. Warsh said given that prices are rising by more than 2% annually, "the Fed's predominant focus right now should be on prices."

Warsh pointed to data showing that in the past year, 54% of goods and services tracked by the government have seen price increases of 3% or higher, well above the 32% that saw such increases in the two decades before the pandemic.

Market Reactions and Rate Expectations

Following Warsh's remarks, the yield on the two-year Treasury, which closely tracks expectations for Fed policy, moved from 22% to 30%, a sign that investors expect short-term yields to move higher. Longer-term yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors aren't worried that higher rates will be needed for a long stretch.

Traders raised the possibility of a rate hike at the September policy meeting to 7%, about 10 percentage points higher than a day earlier, according to the CME Group's FedWatch. Previously, markets had been expecting a September increase, but after recent inflation data, pricing switched to an expectation for the Fed to stay on hold likely until December. Wall Street investors now see the potential for a rate hike at the Fed's next meeting Sept. 15-16 as roughly a coin flip, according to futures pricing tracked by CME FedWatch.

Analysts at Capital Economics said Warsh's speech delivered a "far clearer - and hawkish - message" and left "the door open to a hike" earlier than previously expected.

Fed Minutes Show Internal Split

Before Warsh's speech, minutes from the Fed's July 28-29 meeting, released Wednesday, showed that many participants assessed that policy tightening would likely be necessary if inflation did not decline. The minutes stated that "some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent."

The Federal Open Market Committee voted 9-3 to keep the federal funds rate targeted in a range between 75%, where it has been all year. Those who voted against the decision favored a quarter percentage point increase, judging that doing so would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage. The three "no" votes came from regional presidents Beth Hammack of Cleveland, Lorie Logan of Dallas, and Neel Kashkari of Minneapolis.

Since the July meeting, data releases have mostly shown modest price increases on a monthly basis, though all major indicators have inflation well above the Fed's 2% target. The personal consumption expenditures price index saw a 1% decline for June, though the annual rate was still at 7%. At the same time, the employment picture has softened: nonfarm payrolls fell by 23,000 in July even as the unemployment rate dropped to 1%, the latter primarily due to a shrinking labor force.

Warsh's Economic Outlook and Policy Philosophy

Despite the inflation concerns, Warsh largely expressed confidence in the economy, which he said "appears to have strengthened." He cited benefits from artificial intelligence and said business and consumer spending has held up well. While acknowledging a slowdown in hiring, he attributed that to a flattening labor supply.

Warsh also used the speech to outline his philosophy on policymaking, carefully sidestepping any signals on what he thinks should be done to achieve the Fed's dual mandate of low inflation and full employment. "I stand here today committed to a discipline, not to a decision," he said.

He criticized the practice of "forward guidance," which he said has "overstayed its welcome." He called for a "quieter Fed, more purposeful in its communications," and said, "We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade."

At last year's event, then-Chair Jerome Powell hinted at rate cuts ahead, setting off an aggressive rally on Wall Street. Warsh's remarks contrast sharply with that, emphasizing that "our knowledge just doesn't extend that far—at least not yet—and the factors most relevant to the proper conduct of monetary policy change over time."

Economic Context and External Pressures

Inflation cooled in June and July after spiking in May from soaring gas prices, yet it remains above the central bank's target. The conflict between the US and Iran has contributed to higher oil prices, which have also fuelled bond market investors demanding higher returns, leading to higher borrowing costs for the US government and major corporations. The spike in interest payments has driven US national debt past $40tn, rising by about $90,000 every second, or 8bn a day, according to the Congress Joint Economic Committee.

Longer-term rates have risen due to burgeoning S. government deficits and outsize borrowing by tech firms building AI infrastructure. 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. Both the 10- and 30-year Treasuries recently saw yields hit their highest levels since 2007.

President Donald Trump, who appointed Warsh in May, has continued to call for lower interest rates and has renewed efforts to remove Fed Governor Lisa Cook. Trump has previously said rate hikes "just keeps the country down."

Expert Views

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 detailed guidance. Michael Strain, director of economic policy studies at the American Enterprise Institute, noted that the Fed chair has talked tough on inflation before without hiking the Fed's key rate.

Warsh's Record and Approach

Before becoming chair, Warsh served as a Federal Reserve governor from 2007 through 2011. His quarterly projections from that time, which became public only years later, show a policymaker who was more worried about inflation than nearly all of his colleagues. While others saw 9% unemployment as slack that would keep prices down, Warsh thought the crisis and government policies he considered unfriendly to growth had durably raised unemployment, which therefore wouldn't hold prices down to the degree his colleagues believed.

Now, with unemployment low and inflation running above target for five years, Warsh has declined to submit an interest-rate or economic projection at his first meeting as chairman in June 2025. His views on inflation appear rooted less in demand-side indicators such as unemployment and more in the supply side and government policies. Over the past year, he has suggested that AI-driven advances could give the economy room to grow without triggering inflation.

Warsh also initiated five task forces to look at a variety of Fed functions and suggested that reducing the current meeting schedule from eight per year to six might be productive, though no decisions were made. The minutes from the July meeting also noted an intermeeting incident involving a disruption to transaction settlements, which was managed smoothly due to the Fed's policy of maintaining ample bank reserves.