Key facts
- Federal Reserve Chair Kevin Warsh stated the central bank has "work to do" if inflation does not return to its 2% target.
- Warsh acknowledged that current financial conditions do not appear restrictive.
- He noted that inflation progress has been modest, with about half of PCE basket items increasing above a 3% annual rate.
- Warsh suggested the central bank may need to raise interest rates in the coming months.
- Inflation was 3.7% in July, according to the Fed’s preferred measure.
Federal Reserve Chair Kevin Warsh indicated on Friday that the central bank has "work to do" if inflation does not return to its 2% target, suggesting that interest rate hikes may be necessary.
In his first major speech at the Fed's annual conference in Jackson Hole, Wyoming, Warsh acknowledged that while recent U.S. data show a slight cooling in inflation, "underlying trends have not meaningfully improved." He emphasized the need for confidence that inflation is moving towards the objective at a sufficient speed, stating, "Otherwise, we have work to do."
Warsh expressed skepticism about providing forward guidance on interest-rate policy, arguing it limits the Fed's flexibility. However, he suggested that current interest rates are not sufficiently restrictive to cool inflation, citing robust business investment in AI and strong consumer spending. He noted that inflation data are "more concerning" than job market trends, where the unemployment rate remains low, and argued that inflation is unlikely to return to the target on its own.
He pointed out that over the past year, 54% of goods and services tracked by the government have seen price increases of 3% or higher, a figure significantly above the 32% observed in the two decades prior to the pandemic. Inflation stood at 3.7% in July, according to the Fed's preferred measure, remaining above the central bank's target despite cooling from recent peaks.
Warsh clarified that short-term interest rates are the "predominant tool" for lowering inflation. His remarks come amid market expectations for the Fed to keep rates unchanged at its mid-September meeting, though futures pricing suggests investors are betting on a December hike. The comments also occur as President Donald Trump continues to advocate for lower interest rates and has sought to replace Fed officials who support higher rates.