Warsh Says Fed May Not Be Done Fighting 3.7% Inflation

Warsh's debut Jackson Hole speech avoided any rate signal while warning that inflation at 3.7 percent has not meaningfully improved.

Federal Reserve Chairman Kevin Warsh signaled the central bank may not be done raising rates, saying financing conditions do not look restrictive even as inflation runs at 3.7 percent, well above the 2 percent 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 in his first speech as chairman at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.

The July Personal Consumption Expenditures index rose 3.7 percent from a year earlier, unchanged from June but down from 4.1 percent in May, while core PCE climbed 3.3 percent. The fed funds rate has sat at 3.50 percent to 3.75 percent since the July 28-29 meeting, which passed 9-3 with three dissents favoring a quarter-point hike. "I would be hard pressed to describe broad financial conditions as restrictive," Warsh said.

With the next Federal Open Market Committee decision due Sept. 15-16, futures markets lean against a hike next month but assign strong odds to one by year-end, a repricing that has pushed the 30-year Treasury yield to a 19-year high. The economy shed 23,000 jobs in July, complicating the inflation-versus-growth trade-off.

A Discipline, Not a Decision

Warsh, marking his 100th day in office, used the address to outline a governance philosophy rather than a policy path, declining both to offer forward guidance and to spell out the reaction function that would trigger a rate move. "I stand here today committed to a discipline, not to a decision," he said, adding that forward guidance "has overstayed its welcome."

He called for a "quieter Fed, more purposeful in its communications," arguing that markets should interpret data rather than hang on every word from policymakers. "We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade," Warsh said. He has launched five task forces reviewing Fed functions since taking office in May.

The approach marks a sharp break from his predecessor. At last year's Jackson Hole, then-Chairman Jerome Powell hinted at rate cuts ahead, setting off an aggressive rally on Wall Street. Warsh's reticence has left investors parsing regional officials instead; Kansas City Fed President Jeffrey Schmid, Cleveland Fed President Beth Hammack and Chicago Fed President Austan Goolsbee all warned on the eve of the speech that inflation remains sticky, with Hammack saying "now is the time to act."

The Stakes for September

The hawkish backdrop raises the stakes for the Sept. 15-16 meeting. Hammack, one of three dissenters last month, said she expects inflation to hover near 3 percent by year-end with limited progress in 2027, while Goolsbee cautioned that "everybody should be on edge" about price pressures re-accelerating.

Warsh acknowledged the criticism that his silence leaves markets guessing. "Our knowledge just doesn't extend that far — at least not yet — and the factors most relevant to the proper conduct of monetary policy change over time," he said, pledging to build "more reliable models and more robust rules" during his term.

The last time the Fed held rates while officials publicly debated further tightening was in 2023, when the 2-year Treasury yield climbed roughly 100 basis points over three months before the central bank ultimately stood pat. If inflation fails to cool by September, a similar repricing could hit equities and the dollar, which has already strengthened on rate differentials. If the recent three-month trend holds, Warsh's "work to do" language may prove a placeholder rather than a prelude to action.

This article is for informational purposes only and does not constitute investment advice.