Fed's Warsh warns of more work on inflation

Federal Reserve Chair Kevin Warsh has warned that policymakers will 'have work to do' if they are not confident inflation is moving toward the central bank's 2% target. He delivered this message in his first speech at the annual Jackson Hole Economic Policy Symposium in Wyoming.

Warsh stressed that his comments should not be treated as a guide for future interest rate decisions. However, they signal rates could be raised if policymakers believe inflation remains too high. The latest figures show prices rose 3.4% in the year to July. Another inflation measure closely watched by the Fed is running at 3.7%.

Focus on Prices

Warsh said that given prices are rising by more than 2% annually, the Fed's predominant focus should be on prices. 'Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,' he stated. 'Otherwise, we have work to do.'

While inflation readings looked better than expected over the summer, Warsh said they did not show the current picture had 'meaningfully improved'. The central bank's next interest rate decision is scheduled for 15-16 September.

Market Reaction and Analysis

Following Warsh's remarks, the rates market showed growing expectations of an interest rate rise in September, according to CME data. Analysts at Capital Economics said the speech delivered a 'far clearer - and hawkish - message' that left 'the door open to a hike' earlier than previously expected.

'Hikes are not guaranteed, but Warsh is now at least suggesting he is on board with them if economic growth remains strong and monthly core PCE [Personal Consumption Expenditures] price growth remains a bit too firm,' the analysts said.

Warsh issued a plea not to label his remarks as 'forward guidance'. He criticized the practice of sending signals to markets on future decisions, saying it had 'overstayed its welcome'. 'Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray,' he argued. He added it inhibited the Fed's 'freedom to make the right calls when it's time to decide'.

Broader Economic Context

Interest rates were left unchanged between 3.5% and 3.75% in July for the fifth consecutive time. This came amid inflation concerns due to the ongoing conflict between the US and Iran, which has caused a surge in global oil prices.

Higher oil prices have also fueled bond market investors, who have demanded higher returns. This leads to higher borrowing costs for the US government and other major corporations. Such costs impact mortgages, car loans, and credit cards.

The spike in interest payments has driven the US national debt past $40 trillion. The figure has doubled in a decade under both the Trump and Joe Biden administrations. According to the Congress Joint Economic Committee, the debt is rising by about $90,000 every second, or $7.8 billion a day.

Treasury Secretary Scott Bessent said the government would buy back more debt in a bid to lower borrowing costs, but the market's reaction to the announcement proved short-lived. The reaction of US President Donald Trump to any Fed decision will be closely watched, with mid-term elections looming and voters concerned about affordability. Trump, who appointed Warsh in May, repeatedly criticized his predecessor Jerome Powell and has previously said rate hikes 'just keeps the country down'.