Fed Chair Kevin Warsh stresses that controlling inflation remains the central bank’s top priority, lifting expectations of a possible near-term rate hike
Jackson Hole, Wyoming: US Federal Reserve Chair Kevin Warsh has placed inflation firmly at the centre of monetary policy, using his keynote address at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole to underline the importance of bringing inflation back toward the central bank’s target.
Warsh’s address was his first major speech as Fed chair and was closely watched by financial markets for clues about the future direction of US interest rates.
Warsh signals continued focus on inflation
Although Warsh stopped short of explicitly calling for an immediate interest-rate increase, his comments indicated that the Federal Reserve is not satisfied with the pace at which underlying inflation is declining.
He stressed that policymakers need to be confident that underlying inflation is moving toward the Fed’s objective at a sufficiently fast pace. If that confidence is absent, he indicated that policymakers still have more work to do.
His comments triggered an immediate increase in market expectations for a near-term rate hike.
Investors are now closely watching the next US consumer inflation data, scheduled to be released on September 11, only a few days before the Federal Open Market Committee’s September 15-16 meeting.
2% inflation target remains unchanged
Warsh also sought to remove concerns that the Federal Reserve could change its long-standing inflation objective.
He described the Fed’s 2% inflation target, measured through the Personal Consumption Expenditures (PCE) price index, as a firm and fixed target.
This reinforced the message that the central bank remains committed to maintaining price stability rather than allowing higher inflation to become entrenched.
Financial conditions not restraining economy
Warsh also offered his assessment of the broader US economy.
He indicated that financial conditions were not currently placing significant restrictions on economic activity. He also described interest rates as the Fed’s primary tool for fulfilling its monetary-policy mandate.
His comments suggested that monetary policy could remain restrictive if inflation does not show sufficient progress toward the 2% target.
European policymakers also warn about inflation
Inflation concerns were not limited to the United States.
European Central Bank policymakers attending the Jackson Hole gathering also highlighted continuing inflation risks in the euro area.
Primož Dolenc, a member of the ECB Governing Council and governor of the Slovenian central bank, said that the latest economic data indicated that inflation pressures had not resolved themselves.
He also pointed to economic resilience and the continuing conflict in the Middle East as factors that could influence monetary-policy decisions. His comments supported expectations that the ECB could consider another rate increase in September.
Austrian central bank Governor Martin Kocher, another ECB rate-setter, also pointed to increased economic momentum. Regarding inflation, he stressed that policymakers remained alert and were not complacent.
Bank of England takes a more cautious approach
Bank of England Governor Andrew Bailey struck a comparatively less urgent tone.
Bailey indicated that the UK economy was experiencing subdued second-round inflation effects and that the labour market had been weakening for some time.
He suggested that policymakers could continue monitoring developments rather than rushing into another rate increase.
Bailey had previously voted with the majority in a 6-3 decision on July 30 to keep interest rates unchanged.
Major central bankers absent from Jackson Hole
Several prominent central bankers did not attend this year’s gathering.
ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda were absent from the symposium. Both were scheduled to attend a meeting of G20 finance ministers and central bank governors in Asheville, North Carolina.
Former Fed Chair Jerome Powell was also absent. Powell remained on the Federal Reserve Board of Governors after his term as chair ended in May but has largely stayed away from the public spotlight since leaving the chairmanship.
Technology and the future of monetary policy
Beyond interest rates and inflation, Jackson Hole also served as a platform for discussions on economic research and financial innovation.
This year’s papers focused heavily on financial innovation and its implications for payments and monetary policy.
Economists and policymakers discussed the growing impact of technologies such as tokenisation, which is changing the way financial assets can be held and transferred.
The discussions highlighted the challenge facing central banks as they attempt to keep regulatory and monetary frameworks aligned with rapid technological developments in the financial system.
Lisa Cook issue adds political dimension
The Federal Reserve also remains under political pressure.
Ahead of the Jackson Hole conference, the White House renewed efforts to remove Fed Governor Lisa Cook over allegations relating to mortgage fraud.
Cook’s lawyer rejected the allegations in a letter, describing them as unfounded and untrue.
The dispute follows an earlier attempt by US President Donald Trump to remove Cook, which was narrowly unsuccessful at the Supreme Court, partly on procedural grounds.
Markets now focus on September Fed meeting
Warsh’s Jackson Hole speech has shifted market attention toward the upcoming inflation data and the Federal Reserve’s September policy meeting.
While the Fed chair did not explicitly announce support for a rate hike, his emphasis on persistent inflation and the need for stronger evidence of progress toward the 2% target has increased expectations that policymakers could keep monetary policy tighter for longer.
The September 11 inflation report is therefore expected to play a crucial role in shaping expectations ahead of the September 15-16 Federal Reserve meeting.
