Warsh signals US Fed may need to raise rates if above-target inflation lingers

The US central bank will “have work to do” if policymakers are not confident that underlying inflation is returning to its 2 per cent target, Federal Reserve Chairman Kevin Warsh said on Friday in remarks that acknowledged financial conditions do not appear restrictive and marked the closest he has come to acknowledging 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. ‌Otherwise, we have work to do. That’s our job … our mandate … and our charge to keep,” Warsh said in remarks prepared for delivery to the Fed’s Jackson Hole economic symposium in Wyoming.

The remarks drew applause from an audience of global central bankers hungry for more than the vague promises to deliver price stability that have been a feature of Warsh’s previous remarks. Markets also heard the message, raising bets on a rate hike next month that had previously been priced in as more of a long shot.

While much of the 16-page address focused on large issues, like the influence of artificial intelligence, that Warsh feels will be critical in the long run, it also included some key acknowledgements – including that “short-term interest rates are the predominant tool to achieve the dual mandate”.

Notably, Warsh said the recommendations of five task forces he has commissioned to study longer-term issues “will come later and have no bearing on decisions we make in the current policy conjuncture. But I believe that for future policy challenges, this intellectual investment ⁠today will leave us far better prepared”.

He did not directly address recent market interventions by US Treasury Secretary Scott Bessent but did say that the Fed “needs clear market signals, as unfiltered ‌as possible”, to set proper monetary policy. But it was his comments on inflation that arguably went the furthest to meet what some had seen as a gap in Warsh’s remarks at his first two press conferences.