Federal Reserve Chair Kevin Warsh said on Friday that inflation remains the central bank's predominant concern and that the Fed may need to tighten policy if price pressures do not clearly move toward its 2% target.
Speaking at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, Warsh said some prices are rising faster than the Fed's objective and that the labor market, with unemployment still low, is not the main source of concern. He said the Fed's job is to keep inflation expectations anchored and that it must be confident underlying inflation is moving to its objective clearly and at sufficient speed.
Warsh cited data showing that over the past 12 months, 54% of goods and services in the personal consumption expenditures basket recorded price increases above 3%. He said that was below post-pandemic highs of about 77% but above the 32% share in the two decades before the pandemic. Over the past six months, 49% of PCE items showed annualized price increases above 3%.
The Fed's monetary policy committee had warned in July that inflation remained too high, Warsh said, and summer data had not shown a meaningful improvement in underlying trends. He said the Fed's mandate requires action if inflation does not move toward target.
The remarks lifted expectations of a September rate increase. CME Fedwatch data showed the probability of a quarter-point hike at the next meeting rising to 55.5% from 35.4% the previous day. Earlier in the day, investors had pushed the probability to almost 60%. Short-term US Treasury yields rose, while long-term yields eased slightly, suggesting investors were pricing in a higher probability of tightening without a major reassessment of longer-term inflation risk.
The US dollar strengthened after the speech. The dollar index rose 0.3%, the pound fell about a third of a cent to $1.356, and the euro lost almost half a cent to $1.16. Kathleen Brooks of XTB said the dollar was the top-performing major currency on Friday.
Analysts said the speech was hawkish and reduced the Fed's reliance on forward guidance. Steve Blitz of TS Lombard said Warsh appeared set to tighten in September unless incoming data provided more room. George Curtis of TwentyFour Asset Management said not hiking in September could damage credibility absent a material improvement in inflation data. Capital Economics said the remarks left the door open to a hike earlier than its December forecast if price data are firm. Christian Hantel of Vontobel said investors gained clarity from the Fed's commitment to the 2% target and should expect less guidance.
A September hike could also complicate the Fed's relationship with President Donald Trump, who has pushed for lower interest rates.
Warsh also said artificial intelligence could support substantially higher growth, while questioning who would capture the gains. He reiterated opposition to extensive forward guidance, arguing that a quieter Fed would be better positioned to meet its objectives.
