JACKSON HOLE, Wyoming – The US central bank will “have work to do” if policymakers are not confident that underlying inflation is returning to its 2 per cent target, Federal Reserve chairman Kevin Warsh said on Aug 28, in remarks that acknowledged financial conditions do not appear restrictive and marked the closest he has come to acknowledging interest rate hikes may be needed to ease price pressures.
“Here is my standard: 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 our job… our mandate… and our charge to keep,” he said in remarks prepared for delivery to the Fed’s Jackson Hole economic symposium in Wyoming.
Short-term Treasuries sold off in anticipation of rate increases as soon as September, with the two-year Treasury yield rising 6.6 basis points to 4.29 per cent, its highest in a month. The 10-year Treasury yield was flat at 4.672 per cent and the 30-year Treasury yield was down three basis points at 5.16 per cent.
US stocks were little changed at mid-morning on Aug 28, while the US dollar index rose 0.4 per cent to 99.55, again reflecting expectations that rates will rise. The rates market was showing a 46 per cent chance of an increase in September, up from 35 per cent on Aug 27, according to CME Group data.
While much of the 16-page address focused on large issues, like the influence of artificial intelligence, that Warsh 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”.
Notably, he said the recommendations of five task forces he has commissioned to study longer-term issues “will come later and have no bearing on decisions we make in the current policy conjuncture. But I believe that for future policy challenges, this intellectual investment today will leave us far better prepared”.
He did not directly address recent market interventions by US Treasury Secretary Scott Bessent, but did say that the Fed “needs clear market signals, as unfiltered as possible”, to set proper monetary policy.
But it was Warsh’s comments on inflation that arguably went the furthest to meet what some had seen as a gap in his remarks at his first two press conferences.
“Progress over the past two years has been modest,” he said of inflation readings that by the Fed’s preferred Personal Consumption Expenditures Price Index remained at 3.7 per cent on an annual basis as of July.
Recent data “do not tell me that underlying trends have meaningfully improved”, he said, with about half of the items in the PCE basket of goods and services increasing at more than a 3 per cent annual rate, below the ratio seen during the Covid-19 inflation surge but above the pre-pandemic norm.
Inflation expectations must be ‘closely minded’
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.
But they do amount to his most detailed comments yet on where the Fed stands in its efforts to return inflation to the 2 per cent target after more than five years above it. He noted, in another elaboration, that he currently sees inflation expectations as anchored, though they must be “closely minded”. “It’s the Fed’s job to make sure that inflation expectations do not get unanchored,” Warsh said.
He also said that not only does the economy appear resilient, but also that given current market interest rates, and a Fed short-term policy rate unchanged since December, “credit and loan markets are showing few signs of policy restraint” – comments that could lay the groundwork for arguments in favour of a rate hike if inflation persists.
Ahead of Warsh’s speech, investors saw a roughly one-in-three chance the central bank would raise rates in September.
A hike at or by the Dec 8-9 meeting was given more than a 90 per cent probability, according to data from CME’s FedWatch Tool.
There was sentiment at the July meeting to tighten policy, with three policymakers dissenting from the decision to keep the policy rate steady in the current 3.50-3.75 per cent range, where it has been since December. Key unemployment, job growth and consumer inflation data for August will be released early in September. REUTERS
