Federal Reserve Chairman Kevin Warsh delivered a more hawkish message on inflation at the Jackson Hole Economic Policy Symposium on Friday, telling central bankers and market participants that recent consumer price data does not yet show “underlying trends have meaningfully improved” toward the Fed’s target.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” Warsh said at the Federal Reserve Bank of Kansas City’s annual policy symposium.
Warsh reaffirmed that the Fed’s 2% inflation goal, defined by the Personal Consumption Expenditures (PCE) price index, is “a firm, fixed target.” But he emphasized that “responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank,” underscoring that policy may not yet be restrictive enough to restore price stability on a durable basis.
The speech immediately rippled through financial markets. According to the CME Group’s Fed Watch, the implied probability of a 25-basis-point rate hike at the Fed’s September meeting rose to 55.7% on Friday morning, up from 35.4% a day earlier, as traders reassessed the odds of additional tightening.
Inflation still a concern
Warsh pointed to the breadth of price increases within the PCE basket as a key concern. Of the 199 individual components of the PCE price measure, 54% showed price gains above 3% over the past 12 months. That share is down from post-pandemic highs of about 77% but still well above the roughly 32% average in the two decades before COVID-19.
The PCE index is running at 3.7% year over year, and measures of underlying trend inflation – which strip out idiosyncratic price swings – have made only modest progress over the past two years, Warsh said.
On inflation expectations, Warsh noted that medium-term measures appear stable but cautioned that “the thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don’t.” He also said he is watching the recent pickup in commodity prices as a potential upside risk to inflation.
Warsh described an economy that remains robust despite higher interest rates. He said labor markets are stable, output is solid and business capital expenditures are rising rapidly. For S&P 500 companies, profits have grown more than 20% over the past year, real consumer spending has held up through multiple shocks, and credit and loan markets show “few signs of policy restraint.”
“Certain sectors — like housing and agriculture — are showing strains. But on balance, I would be hard pressed to describe broad financial conditions as restrictive,” he said. “I believe the labor markets are consistent with full employment.”
Policy framework
Warsh reiterated his longstanding views on the Fed’s framework. He said he does not believe the central bank’s dual mandate of maximum employment and price stability works at cross-purposes, also arguing that unconventional tools to boost activity are appropriate in genuine crises but “should otherwise be used sparingly, if at all.”
He also urged closer attention to the role of money creation by the central bank and by the broader banking and financial system in assessing inflation pressures and financial conditions.
“Finally, a quieter Fed, more purposeful in its communications, is better able to meet its objectives,” Warsh said, suggesting that clearer, less frequent signals from policymakers could help anchor expectations and reduce market volatility. “I stand here today committed to a discipline, not to a decision.”