Federal Reserve Chairman Kevin Warsh expressed concern Friday about elevated inflation while hinting that interest rates could need to move higher if more progress isn't made on easing price pressures.
Warsh's closely watched remarks at the Fed's annual symposium in Jackson Hole, Wyoming, avoided committing either to forward guidance — or verbal cues about the Fed's intentions — or reaction function, the economic signals that would warrant an adjustment in rates.
However, he did acknowledge that inflation is running hot, saying, "while this summer's [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved."
"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," he added.
Stock market indexes climbed after digesting the speech, delivered at 10 a.m. ET, while Treasury yields moved substantially higher. The policy-sensitive 2-year note soared nearly 8 basis points, or 0.08 percentage point, to 4.31%, its highest since late July.
Read Kevin Warsh's full speech at Jackson Hole
Traders also raised the probability for a rate hike at the September policy meeting to 55.7%, or about 20 percentage points higher than a day ago, according to the CME Group's FedWatch tool.
Warsh "opened the door to a Fed rate hike. A hike probably won't come in September, but it will by October or December," said Heather Long, chief economist at Navy Federal Credit Union. "Warsh explicitly said this summer's encouraging inflation readings don't indicate 'meaningful' improvement on inflation. Bond markets reacted swiftly by pricing in a hike."
Warsh noted that "market prices show confidence that we will deliver price stability. And I can assure you they're right."
Aside from the inflation concerns, which he said should be the Fed's primary focus, Warsh largely expressed confidence in the economy which he said "appears to have strengthened."
As he has done previously, the chairman cited benefits from artificial intelligence and said business and consumer spending has held up well. While acknowledging a slowdown in hiring, he attributed that to a flattening labor supply.
Warsh also used the speech to outline his philosophy on policymaking while carefully sidestepping any signals on what he thinks should be done to achieve the Fed's dual mandate of low inflation and full employment.
"I stand here today committed to a discipline, not to a decision," Warsh said in prepared remarks for a group that includes his fellow policymakers on the Federal Open Market Committee as well as economists and media members.
The chairman has been criticized for being cagey about his approach to policy at a time when inflation continues to run well above the Fed's 2% goal. He has opposed the prior use of forward guidance as hand-holding for markets that should be interpreting data, not Fed rhetoric.
Early in the speech, titled "In Our Time," he quipped that, "You can call it an outline, you can call it a trail map, just don't call it forward guidance," a practice that he said "has overstayed its welcome."
However, the broader message was in seeking a change in approach to how the Fed sees its role with the market and the public.
Since taking office in May — Warsh noted that this is his 100th day in office — he has initiated five task forces to look at a variety of Fed functions. One overriding theme has been getting markets away from hinging on every word that comes from policymakers. He called for a "quieter Fed, more purposeful in its communications."
"The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next," he said. "But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade."
Warsh's speech differed from his predecessors, who often utilized Jackson Hole either as a cue on the direction of rates, broad changes to the Fed's framework, or to delineate new ways of approaching monetary policy. At last year's event, then-Chair Jerome Powell hinted at rate cuts ahead, setting off an aggressive rally on Wall Street.
In his brief time at the helm, Warsh has sought to chart a new course that harkens back to the pre-financial crisis Fed where markets were given less certain signals and the Fed had a smaller hand.
While market participants have adjusted to the lack of forward guidance, they have looked to Warsh at least to provide a reaction function on what would trigger a policy response. Even on that note, he was reluctant to commit.
"So, if forward guidance is ill-suited to normal times, then how about the new Fed chief commits—at the very least—to an explicit reaction function? Surely, he should tell us his interest rate path—if, say, the data were to come in hot or cold." he said, in seeming acknowledgement of the criticism. He specifically asked whether the Fed should provide a specific rule that it would follow.
Warsh, though, asserted that "our knowledge just doesn't extend that far—at least not yet—and the factors most relevant to the proper conduct of monetary policy change over time."
"In my term as Chairman, my colleagues and I will endeavor to construct more reliable models and more robust rules to guide policy decisions. We'll do this knowing that accuracy in economic forecasting is still just an aspiration. With so much changing so fast in geopolitics, global supply chains, and technology, it's wise to be modest about what we can and cannot know," he said.
Warsh did not mention in the speech the recent announcement from Treasury Secretary Scott Bessent of accelerated buybacks of government debt, a move that seems contrary to the Fed chair's desire for less government involvement in markets.
