Fed Chair Kevin Warsh signals rate hike if inflation fails to cool towards 2% target

Federal Reserve Chair Kevin Warsh on Friday said that the US central bank may need to raise interest rates if inflation does not move towards its 2% target, signalling a tougher approach to price pressures than in his earlier comments.

Speaking at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Warsh said recent data showed some cooling in inflation but did not indicate that underlying price pressures had improved enough.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do.”

Warsh, who replaced Jerome Powell in late May, did not indicate that a rate increase was imminent. But he said inflation remained a concern and that interest rates may not be high enough to bring price growth back to the Fed’s 2% target.

 

Inflation remains above Fed target

The Fed’s preferred inflation measure stood at 3.7% in July, according to the data cited by Warsh. Inflation had eased in June and July after rising in May as gas prices increased, but remained above the central bank’s target.

Warsh said 54% of goods and services tracked by the government had recorded price increases of at least 3% over the past year. That was down from the pandemic period but above the 32% recorded on average in the two decades before the pandemic.

He said inflation was “more concerning” than developments in the labour market, where unemployment remains low, and argued that price growth was unlikely to return to the Fed’s target without further action.

Warsh also said current interest rates did not appear to be restricting economic activity. He pointed to business investment in artificial intelligence equipment and infrastructure, as well as consumer spending.

Interest rates are generally raised to make borrowing more expensive and reduce spending and investment, helping to ease inflation.

The Fed is due to meet on September 15-16. Warsh's remarks did not indicate whether rates would be raised at that meeting.

 

Markets reassess rate outlook

US stocks were little changed after the speech, while Treasury yields moved higher at the short end of the curve. The two-year Treasury yield rose from 4.22% to 4.30%, reflecting higher expectations for the federal funds rate.

Yields on 10-year and 30-year Treasuries were little changed, suggesting investors did not expect higher rates to remain necessary for an extended period.

Futures pricing tracked by CME FedWatch showed that investors saw roughly a 50% chance of a rate increase at the September meeting, compared with about one-third before Warsh's speech.

Jon Faust, an economist at Johns Hopkins University and former adviser to Powell, said Warsh had indicated that he would support raising rates if needed while avoiding specific guidance on future policy.

Michael Strain, director of economic policy studies at the American Enterprise Institute, said Warsh had previously taken a firm position on inflation without raising the Fed's benchmark rate. He said Friday's remarks did not clarify when the central bank might act.

Warsh reiterated his opposition to forward guidance on interest rates, saying such commitments could limit the Fed's flexibility. He also clarified that short-term interest rates are the “predominant tool” available to the central bank for lowering inflation.

The speech comes as President Donald Trump continues to call for lower interest rates. Trump appointed Warsh as Fed chair but has criticised other Fed officials for supporting higher rates.

Trump has also sought to remove Fed Governor Lisa Cook, an appointee of former President Joe Biden. The effort is being challenged in court.

Longer-term Treasury yields have risen in recent weeks amid factors including higher US government deficits and borrowing by technology companies investing in artificial intelligence infrastructure. The 30-year Treasury yield reached its highest level in 19 years last week, prompting Treasury Secretary Scott Bessent to announce a bond buyback programme.