Federal Reserve Chairman Kevin Warsh on Friday expressed concern about rising inflation but suggested interest rates may need to be raised if there is no further progress in easing price pressures.
Mr. Warsh’s remarks, highlighted at the Fed’s annual symposium in Jackson Hole, Wyoming, avoided committing to either forward guidance (or verbal signals about the Fed’s intentions) or reaction functions, the economic signals that justify adjusting interest rates.
But he acknowledged that inflation was heating up, saying: “This summer’s (inflation) readings were better than expected, but we cannot say that the underlying trend has improved in any meaningful way.”
“We must be confident that underlying inflation is moving clearly and fast enough toward our goals. If not, we have a job to do. That is our job…our mission…and our responsibility to uphold.”
After the 10 a.m. ET announcement, stock indexes were little changed, but U.S. Treasury yields rose significantly. Traders raised the probability of a rate hike at the September policy meeting to 45.7%, up about 10 percentage points from the previous day, according to CME Group’s FedWatch.
Aside from inflation concerns, which he said should be the Fed’s main focus, Warsh expressed general confidence in the economy, which he said “seems to be strengthening.”
As before, he cited the benefits of artificial intelligence and said business and consumer spending remains strong. Although he acknowledged the slowdown in employment, he said the cause was flat labor supply.
Mr. Warsh also used the speech to outline his philosophy on policymaking, carefully avoiding any signals about what he thinks the Fed should do to achieve its dual mandate of low inflation and full employment.
“I stand here today to defend discipline, not decision,” Warsh said in prepared remarks to a group of Federal Open Market Committee policymakers, economists and members of the media.
Responding to critics
He has been criticized for being cautious in his approach to policy at a time when inflation remains well above the Fed’s 2% target. He has opposed the preemptive use of forward guidance to help markets, which should interpret the data rather than the Fed’s rhetoric.
“You can call this an overview…you can call it a trail map…just don’t call it forward guidance,” he joked at the beginning of his talk, titled “In Our Time,” saying the practice had “overstayed its welcome.”
But the broader message was to call for a change in approach to how the Fed views its role vis-à-vis markets and the public.
Since taking office in May — Mr. Warsh said this is his 100th day in office — he has created five task forces to examine various functions of the Fed. One of the most important themes is to ensure that markets are not dependent on the every word of policymakers. He called for ” quieter, more purposeful communication from the Fed.”
“The Fed plays an important role in the economy and markets, and our tools are powerful. We determine the path of short-term interest rates, and market participants will always be trying to predict what we will do next.” “But we shouldn’t be content with a system where market participants look primarily to the Fed for their next trade.”
Mr. Warsh’s speech differed from his predecessors, who often used Jackson Hole as a cue for broader changes to the direction of interest rates or the Fed’s framework, or to chart a new approach to monetary policy. At last year’s event, then-Chairman Jerome Powell hinted at future rate cuts, sparking an aggressive rally on Wall Street.
No reaction function
During his brief tenure, Mr. Warsh has sought to chart a new course that harkens back to the pre-crisis era, when the Fed’s signals to markets were less certain and the Fed’s involvement was smaller.
Market participants are adjusting to the lack of forward guidance, but are looking to Warsh to at least provide a reactionary function on what will trigger a policy response. On that point, too, he was reluctant to commit.
“So if forward guidance is not appropriate in normal times, why not commit to a new Fed president — at the very least — a clear response function? Certainly, he should be able to tell us what the outlook for interest rates is — for example, when the data is strong or when the data is weak,” he said, seemingly acknowledging the criticism. Specifically, he asked whether the Fed should provide specific rules to follow.
But Warsh argued that “our knowledge is not that extensive, at least not yet, and the factors most relevant to the proper conduct of monetary policy change over time.”
“During my term as Chair, my colleagues and I will work to build more reliable models and stronger rules to guide policy decisions,” he said. “We will do this knowing that the accuracy of economic forecasts remains an aspiration. With so much changing rapidly in geopolitics, global supply chains, and technology, it is wise to be conservative about what we can and cannot know.”
In his speech, Warsh did not mention Treasury Secretary Scott Bessent’s recently announced acceleration of government bond purchases, which appears to run counter to the Fed chairman’s desire to reduce the government’s involvement in markets.
