Federal Reserve Chair Kevin Warsh said Friday he does not see the central bank’s current policy as “restrictive” and that there may be “work to do” on inflation – sparking bets the Fed will hike interest rates next month.
During his widely anticipated speech at the Fed’s annual retreat in Jackson Hole, Wyo., Warsh said he is “impressed” by rising business capital expenditures, strong corporate earnings, a stable labor market and relatively healthy consumer spending.
“Certain sectors – like housing and agriculture – are showing strains. But, on the balance, I would be hard pressed to describe broad financial conditions as restrictive,” Warsh said.
Though inflation estimates in the medium-term “look stable,” this summer’s inflation readings “do not tell me that underlying trends have meaningfully improved,” he added.
After his speech, odds of an interest-rate hike at the Fed’s September 16 meeting jumped to 55% – a 20% jump from immediately before the address, according to CME FedWatch.
Larry Holzenthaler, senior portfolio manager at Catalyst Funds, said Warsh appeared very focused on inflation and bringing it down to the Fed’s 2% goal.
“I would say Warsh was successful in establishing confidence,” Holzenthaler wrote in a note Friday.
“The market seems to be reacting exactly the way the Fed wants, short term rates are higher while long term rates are marginally lower following his comments. Investors should clearly expect that the Fed is going to raise rates if it needs to.”
Warsh repeated his vow from last month’s policy meeting that the Fed will lower prices, though he again bashed the practice of sharing “forward guidance” – saying he is “committed to a discipline, not to a decision.”
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do. That’s our job…our mandate…and our charge to keep.”
He argued that forward guidance has harmed policy decisions in the past, like in 2021, where it “might well have slowed the policy response to high inflation” – a jab at his immediate predecessor, Jerome Powell.
“If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments…more likely to be caught unprepared for a turn of events…and more likely to commit errors in policymaking,” said the new chairman, who took the helm in May.
Critics have argued that Warsh’s reluctance to share forward guidance is confusing investors, driving a massive surge in Treasury yields over the past few weeks.
In the past, previous Fed chairs – including Warsh’s immediate predecessor, Jerome Powell – have used their appearance in the Teton mountains of Wyoming to deliver major policy announcements.
Last month, Warsh said he would use the Jackson Hole speech to “frame the big questions” facing the central bank. There’s no shortage of those, as policymakers face stubborn inflation, rising bond yields and growing dissent within the central bank.
Cleveland Fed President Beth Hammack – one of three Fed officials who wanted a rate hike last month – said Thursday that the central bank should raise rates soon to tackle inflation.
“I believe it’s time to act. I think we’ve seen inflation above target for too long,” Hammock said Thursday at the conference.
Inflation hit 3.4% in July – down from levels above 4% in May but still stubbornly above the Fed’s 2% goal.
Rising oil prices amid the war in Iran have been slow to cool off, while prices at gasoline pumps have remained above $4 a gallon, forcing consumers to cut back elsewhere.
Meanwhile, in the weeks since the Fed’s last meeting, Treasury yields have surged – a sign that investors are doubting the central bank’s commitment to act on inflation.
Last week, the Treasury Department announced plans to “at least double” debt buybacks to roughly $4 billion. Bond yields briefly eased, but rebounded the following day.
At the Fed’s July meeting, Warsh repeatedly emphasized that the committee’s priority is lowering prices, which implies a bias toward raising interest rates.
But he refused to answer how he planned to ease inflation or when he would be ready to hike rates, leaving investors unsure whether the Fed is willing to raise rates in the fall.
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