Warsh Says Fed Has Work to Do If Inflation Doesn’t Fall
By Jacqueline Policastro | Quincy News Correspondent
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Washington (Quincy News) — Federal Reserve Chair Kevin Warsh gave markets his clearest signal yet Friday about what could prompt a rate increase, warning that inflation remains too high and financial conditions show few signs of restraint.
In his first speech as Fed chair at the central bank’s annual economic policy symposium in Jackson Hole, Wyoming, Warsh stopped short of calling for an increase at the Fed’s Sept. 15-16 meeting. But he laid out an inflation test that suggests the Fed may still have work to do.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said, adding that otherwise the Fed still has work to do.
Policymakers voted 9-3 in July to leave the federal funds rate target range at 3.5% to 3.75%, where it has been since December.
By Friday afternoon, CME FedWatch put the probability of a quarter-point rate increase in September at nearly 60%, up from about 35% a day earlier. Short-term Treasury yields climbed sharply after the speech, with the two-year note, especially sensitive to Fed policy, reaching its highest level in about a month.
Warsh declined to preview a specific decision, consistent with his push for the Fed to provide less guidance about future policy moves.
He said the economy “appears to have strengthened” and the labor market remains broadly “consistent with full employment,” despite nonfarm payrolls falling by 23,000 in July. He argued that slower job gains are natural when the supply of available workers is barely growing, leaving inflation as the Fed’s predominant focus.
“There should be no misunderstanding,” Warsh said. “The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target.”
The PCE price index rose 3.7% from a year earlier in July and at a 4.1% annualized pace over the past six months. Warsh said summer inflation reports had been better than expected but showed little improvement in the underlying trend. He noted that 54% of the 199 categories in the PCE index rose more than 3% over the past year, compared with 32% in the two decades before the pandemic.
Persistent inflation has also prompted some Fed officials to call for higher rates. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissented from the July decision, favoring a quarter-point increase. Minutes from the meeting showed several officials supported an increase, while many saw further tightening as likely if inflation failed to decline.
Warsh backed waiting for more information in July. On Friday, he emphasized that short-term interest rates remain the Fed’s primary tool and placed responsibility for what he called 65 months of elevated inflation on the central bank.
Warsh also said that routine forward guidance, a practice he helped introduce during the 2008 financial crisis, has outlived its usefulness in normal times. Signaling too much, he said, can constrain future policy decisions and create a “hall of mirrors” in which investors follow the Fed while the Fed reads market prices.
That puts greater focus on the data ahead. The August jobs report arrives Sept. 4 and the CPI report follows Sept. 11, giving policymakers two major readings before the Fed’s September meeting.
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