The Chairman of the Federal Reserve System, Kevin Warsh, warned that inflation is not slowing down significantly. He stated that regulators must be confident in its deceleration; otherwise, according to him, the central bank “has work to do”.
Warsh delivered an important speech, his first address since taking the helm of the central bank in May. He confirmed that regulators will return inflation to the target level of 2%, which he called unchanged and fixed.
“Here is my criterion: we must be confident that core inflation is moving toward our goal, clearly and at a sufficient pace. Otherwise, we have work to do. That is our job,” Warsh said at the Fed’s annual conference in Jackson Hole, Wyoming, on Friday.
Policy tools and market reaction
Kevin Warsh added that financial conditions are currently not restrictive, and interest rates are the “primary tool” of the Fed to achieve its mandate. However, he did not express support for raising the interest rate at the Fed’s September meeting.
“I stand here today committed to discipline, not to a decision,” he stated.
The yield on two-year Treasury notes increased by a full nine basis points to 4.32%, while the yield on 30-year bonds decreased by two basis points to 5.17%. These changes suggest expectations that the Fed may have to raise short-term rates.
According to federal funds futures, the predicted probability of a rate hike in September rose to over 50%, compared to approximately 36% before the speech.
Data assessment and future decisions
Omair Sharif, president of Inflation Insights LLC, noted that Warsh provided the markets with the desired information, namely more details about his views on current data, particularly inflation. “Of course, he did not reveal his cards regarding any future policy actions. In this sense, it looks like a no‑lose situation for Warsh and the markets,” Sharif added.
Warsh also noted that since inflation exceeds 2%, the Fed’s primary focus is now on prices. He also made it clear that the recent data has not been entirely encouraging.
“While the PCE and CPI figures this summer were better than expected, they do not tell me that the underlying trends have improved significantly,” Warsh said. “Market prices demonstrate confidence that we will ensure price stability. And I can assure you, they are right.”
The Fed expects to receive consumer price data for August on September 11. This report could prove crucial at its next meeting on September 15‑16.
Source: Bloomberg
