Fed Chair Warsh warns inflation is still too high but won't signal rate hike

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The Fed chair stopped short of signaling a rate hike but said the central bank may have "work to do" if price trends don't improve

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Federal Reserve Chairman Kevin Warsh warned Friday that recent inflation data have not shown meaningful improvement in underlying price trends, while declining to signal whether the central bank would raise interest rates.

Speaking at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming — his first keynote address at the event as Fed chair — Warsh said the central bank remains focused on bringing inflation down. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," he said in prepared remarks. "Otherwise, we have work to do. That's our job, our mandate, and our charge to keep."

Warsh acknowledged that this summer's inflation readings came in better than expected but said they did not demonstrate that underlying trends had meaningfully improved. The Fed's benchmark federal funds rate currently stands at a target range of 3.5% to 3.75%.

Markets moved on the remarks. The 2-year Treasury yield climbed to 4.28% from around 4.23% before the speech, marking its steepest one-day advance since June, according to The New York Times. Traders moved the odds of a rate increase at the Fed's Sept. 15-16 meeting to roughly 50%. The S&P 500 dipped while Warsh was speaking but managed to recover and close with a modest gain.

Vail Hartman, an analyst at BMO Capital Markets, told The New York Times: "Overall, it was a deliberately hawkish speech that will put to rest any concerns about the Fed's willingness to raise rates to restore price stability."

Warsh used the speech to reinforce his opposition to forward guidance and declined to outline the conditions that would prompt a policy response. "I stand here today committed to a discipline, not to a decision," he said. He quipped that "you can call it an outline, you can call it a trail map, just don't call it forward guidance," adding that the practice "has overstayed its welcome."

Beyond inflation, Warsh described the economy as appearing to have strengthened and characterized recent softening in job gains as a product of constrained labor supply rather than weakening demand.

Warsh also assigned blame for the extended period of elevated prices to the central bank itself. "The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank — and that is where it belongs," he said.

Investors had viewed the Jackson Hole address as Warsh's clearest opportunity to fill what had been a deliberate communications void. Since taking office in May, he has withheld both forward guidance and any definition of his reaction function — a period in which, he noted Friday, he has launched five task forces to review Fed operations.

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