Fed Chair Warsh calls inflation 'concerning,' reaffirms pullback on forward guidance

Federal Reserve Chair Kevin Warsh said Friday he is "concerned" about elevated inflation in the United States, arguing that current financial conditions cannot be characterized as restrictive and that recent improvements in price data alone are not enough to conclude that the underlying inflation trend has meaningfully improved. He also reaffirmed his stance that the Fed should scale back its practice of offering forward guidance on the future path of interest rates.

Speaking at the Jackson Hole Economic Symposium in Wyoming on Friday (local time), Warsh said the Fed needs confidence that underlying inflation "is moving clearly and quickly enough toward our target." "If it isn't, we have work left to do," he added.

The Commerce Department reported Wednesday that the personal consumption expenditures (PCE) price index rose 3.7 percent in July from a year earlier, and 0.2 percent from the prior month — well above the Fed's 2 percent target and 0.1 percentage point higher than the consensus forecast compiled by Dow Jones.

In this regard, Warsh said of this summer's price readings: "Some recent inflation data came in better than expected, but that alone is not enough to conclude that the underlying inflation trend has improved in any meaningful way."

He particularly stressed that inflationary pressures remain broad-based. Roughly half of the components that make up the Fed's preferred inflation gauge are rising at more than 3 percent — a share that hovered around one-third in the two decades before the COVID-19 pandemic.

Warsh also cited the strength of the US economy's fundamentals as a reason to maintain a restrictive stance. He pointed to expanding corporate capital expenditure driven by AI infrastructure investment, solid profitability among S&P 500 companies, tight credit spreads and easing bank lending standards, saying it is "hard to characterize overall financial conditions as restrictive." He also noted that unemployment at around 4.1 percent and robust private consumption indicate the economy remains at full employment.

However, Warsh drew a line when asked whether he would support a rate hike at the next Federal Open Market Committee (FOMC) meeting in September, and offered no guidance on the future path of rates. The stance is consistent with his longstanding position that the Fed should reduce its reliance on forward guidance.

"Call it an outline, call it a road map — just don't call it forward guidance," Warsh said. "I'm not standing here on Friday to commit to a specific decision, but to signal my commitment to a discipline."

He went on to say: "I wish our understanding of the economy were precise enough that we could offer a proven, mechanically applicable answer — but it isn't. When policymakers send signals across the business cycle that amount to near-commitments on the rate path, they constrain their own freedom to make the right call when the actual decision arrives."

Warsh also said there are few signs that the current policy rate of around 3.6 percent is significantly restraining the economy. "Credit and lending markets show little evidence of monetary policy's restrictive effect," he said. "There are some pressures in housing and agriculture, but it is hard to describe overall financial conditions as restrictive."

Friday's remarks were Warsh's first public speech since taking office as Fed chair.

The Jackson Hole gathering took place against a backdrop of multiple uncertainties — including a rising probability of rate hikes amid persistent inflation and potential intervention by the US Treasury in bond markets. Attention had focused on what message Warsh, who has drawn criticism for reducing communication with markets and fueling distrust, would deliver.

The speech appeared to offer the most detailed public account yet of how Warsh views the conflicting signals on growth and inflation that have divided opinion inside the Fed since he took the helm this spring.

Earlier, Warsh explained that the decision to hold rates last month reflected a judgment that "waiting for new information was the wiser choice." He added that it was necessary to assess potential shifts in "supply chains, investment flows and geopolitical conditions" before deciding whether to change the policy rate.

Meanwhile, US government bond yields rose after Warsh's remarks, with short-term yields — which are more sensitive to rate expectations — leading the move.

The two-year Treasury yield climbed to 4.275 percent from 4.224 percent just before his remarks were released, while the 10-year yield edged up to 4.684 percent from 4.662 percent.

Bloomberg reported that market participants were pricing in a 50 percent probability of a rate hike at the FOMC meeting scheduled for Sept. 16 following Warsh's speech.