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Federal Reserve Chair Kevin Warsh said Friday that inflation is still too high and suggested the central bank may have to raise interest rates in the coming months to bring it down, a clearer signal than he had sent previously about his economic outlook.
In his first high-profile speech at the Fed’s annual conference in Jackson Hole, Wyoming, Warsh acknowledged that recent U.S. reports show that inflation has cooled a bit, but “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,” Warsh said. “Otherwise, we have work to do.”
Comments from the new Fed chair appeared to reassure Wall Street that fighting inflation remains the priority for the central bank. Warsh did not imply in his speech that a rate hike is imminent, but at the same time, he seemed to dismiss perceptions that inflation is not a threat.
He pointed to data showing that inflation remains stubbornly above the central bank’s 2% target. Warsh replaced Jerome Powell in late May after his predecessor’s term ended.
The U.S. stock market held steady after the speech, but expectations are building in the bond market for the Fed to hike interest rates. The yield on the two-year Treasury, which closely tracks expectations for what the Fed will do with its federal funds rate, moved from 4.22% to 4.30%, a sign that investors expect short-term yields to move higher.
Longer-term yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors aren’t worried that higher rates will be needed for a long stretch of time to fight inflation.
Jon Faust, an economist at Johns Hopkins and a former adviser to Powell, said Warsh succeeded in conveying a tougher approach on inflation while, at the same time, avoiding the detailed guidance customary among his predecessors that he has disparaged.
“He found a way to convey that if necessary he would support raising rates, which is one thing people were concerned about,” Faust said.
