Federal Reserve Chairman Kevin Warsh on Friday used a speech in Jackson Hole to respond to criticism of his chaotic press conference in July and issue a clearer warning that stubborn inflation could push the Fed to raise interest rates.
Mr. Warsh’s first two press conferences as Fed chairman left many in the market uncertain about where he stands on the trajectory of interest rates, prompting bond traders to sell long-dated bonds to compensate for the uncertainty. In a high-profile speech in Jackson Hole, Wyoming, on Friday, Mr. Warsh indicated he had heard those critics. Based on his unique view of price data, he came as close as ever to suggesting that the economy is on the brink of raising interest rates unless inflation improves.
In Jackson Hole, Mr. Warsh gave an even more hawkish economic outlook than in July. He said inflation needs to be the Fed’s main focus and said financial conditions were not broadly restrictive, a reversal from a July press conference in which he said financial conditions were uneven. He did so while defying his critics and insisting that the Fed’s policy of deliberate vagueness about policy will continue.
“We can be held accountable for doing the job we’re given to do. This is the only true test of our credibility,” Warsh said at a press conference in July, dismissing widespread criticism of his lack of credibility.
The Fed won’t hold an interest rate-setting meeting until mid-September, but Warsh did not say how the Fed would handle interest rates. However, he squarely addressed some of the criticism leveled at him recently.
One of the most damning pieces focused on Warsh’s explanation of how he views the Fed’s core mission of assessing and responding to inflation. The Federal Reserve has formally stated that it will seek to keep inflation, as measured by the Personal Consumption Expenditure Index, at 2% over the long term. Some economists interpreted Mr. Warsh’s vague answers to reporters’ questions last month as suggesting he wanted to change the target even though inflation remains high.
According to government figures released this week, PCE inflation was 3.7% in July.
In Jackson Hole, Warsh recommitted to maintaining the 2% PCE goal, calling it a “firm, fixed goal.”
And he went further. Warsh gave an example of how multiple indicators of inflation are used to reach the conclusion that high prices are a concern. He cited the fundamental components of PCE inflation, noting that 54% of PCE components had annualized inflation above 3% in the past 12 months, and 49% had annualized inflation above 3% in the past six months.
Warsh said these numbers are lower than recent pandemic inflation rates but still above long-term trends, indicating the Fed believes it may need to raise rates.
Warsh also mentioned another measure of inflation, the consumer price index, which he said is running at 3.4%.
“None of these measures are perfect, but they all tell a similar story: inflation remains above our 2% target,” he said.
Mr. Warsh’s comments indicate a more acute understanding of the inflation measure than anything he has previously said. Although he sees individual flaws in the various popular inflation measures, he believes the Fed can use them collectively to understand how prices are trending. And now he’s worried about rising prices.
That was a concern back in July, he said Friday in Jackson Hole.
“The majority of my colleagues and I thought it would be prudent to wait for new information during the conference period.”
Mr. Warsh also addressed another criticism of his performance in July, saying he would not immediately turn to interest rates to fight inflation. President Donald Trump, who has made clear his desire to lower interest rates, chose Warsh. At Jackson Hole, Mr. Warsh made it clear that “short-term interest rates are the primary means of achieving dual mandates.”
Warsh also reiterated that the Fed is closely monitoring developments in artificial intelligence but is not prepared to act on them. The Fed’s special committee examining the use of AI and its impact on the economy is “encouraging,” but so far “has had no impact on our decisions in the current policy mix.”
Mr. Warsh’s treatment of AI is part of a broader reset he is trying to implement, a position he has effectively campaigned for to become Fed chairman in 2025.
He has said in the past that advances in AI could be a reason to cut interest rates. This coincided with President Trump’s call for interest rate cuts. He also said that reducing the Fed’s balance sheet is a reason to lower interest rates.
Warsh currently suggests that AI considerations have little relevance to current policy decisions. And there was no indication that Jackson Hole was on the verge of reducing its balance sheet.
Mr. Trump continues to press for rate cuts, leading some to believe that Mr. Warsh may be holding off on raising interest rates until after the November midterm elections in order to unleash his hawkish impulses. Since Mr. Warsh became chairman, the two have spoken directly, breaking from the tradition in which the Fed’s contact with the administration was through the Treasury secretary.
Warsh did not address Trump in Jackson Hole. But his view of the economy as showing signs of rising price concerns clearly puts him at odds with the president. While President Trump continues to want to lower rates, often touting market performance and what he touts as strong economic data, Warsh’s message Friday was that the Fed is considering the opposite: raising rates in the short term.
The Jackson Hole speech does not allay concerns about the timing of Mr. Warsh’s return to the Fed’s helm. President Trump continues to interfere in the Fed, including restarting efforts to fire Governor Lisa Cook based on weak evidence. And Mr. Warsh has yet to signal concrete action on inflation.
But Warsh’s performance in Jackson Hole will give his Fed colleagues a reason to support him if he decides to take that action in September. His speeches at influential forums should help dispel the idea that he is simply flying blind.
