US Fed chair warns inflation progress insufficient, hints at rate hikes

United States Federal Reserve Chairman Kevin Warsh said the US central bank will “have work to do” if policymakers are not confident that underlying inflation is returning to its 2 percent target.

On Friday, Warsh stressed that financial conditions do not appear restrictive enough, the closest he has come to acknowledging that interest rate hikes may be needed to ease price pressures.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said in an address at the Federal Reserve’s Jackson Hole economic symposium in the US state of Wyoming.

Warsh did not suggest a timeline for rate hikes and stressed that his comments should not be taken as “forward guidance”.

However, it is becoming increasingly probable that a rate hike could be on the way. CME Group’s FedWatch, which tracks the likelihood of monetary policy decisions, shows a 57.4 percent chance that the central bank will raise rates by 25 basis points at its next meeting in mid-September.

“Short-term interest rates are the predominant tool to achieve the dual mandate,” Warsh said in his remarks on Friday.

“It’s the Fed’s job to make sure that inflation expectations do not get unanchored.”

Warsh also addressed the Personal Consumption Expenditures Price Index (PCE), the central bank’s preferred metric for gauging the rate of inflation, which remained at 3.7 percent on an annual basis as of July.

“Progress over the past two years has been modest,” Warsh said. He added that the data does “not tell me that underlying trends have meaningfully improved”.

He stressed that inflation shown in the PCE report has been increasing by 3 percent, which is well above pre-pandemic levels.

Warsh’s speech “delivered a far clearer – and hawkish – message than his last press conference appearance,” Capital Economics analysts wrote in a note to clients. “That leaves the door open to a hike earlier than our current forecast of December, if the forthcoming price data are firm.”

While Warsh addressed the more immediate pressures on interest rates, much of his address was focused on big-picture issues, such as the role that artificial intelligence will have on the economy.

He said the recommendations from the five task forces the central bank created will come later and will address “future policy challenges”.