JACKSON, Wyoming — Federal Reserve Chair Kevin Warsh has delivered his clearest signal yet that the central bank could raise interest rates again if inflation fails to show convincing progress toward the Fed’s 2% target.
Speaking Friday at the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium, Warsh said the Fed must be confident that underlying inflation is falling “clearly and at sufficient speed” toward its goal. If that confidence does not emerge, he said, “we have work to do.”
Warsh did not explicitly promise an interest-rate increase at the Fed’s next meeting in September. But his remarks were widely interpreted by investors and analysts as opening the door to a hike in the coming months.
“The predominant focus right now should be on prices,” Warsh said, arguing that inflation remains too high even after some recent signs of cooling.
Markets reacted quickly.
Futures tied to the federal funds rate showed about a 60% chance that the Fed would raise rates at its Sept. 16 meeting, up from roughly 35% before Warsh’s speech, Reuters reported.
The shift underscores the importance of Warsh’s Jackson Hole debut. Investors had been uncertain about his approach to inflation and rate policy during his first months as Fed chair. His speech did not offer precise forward guidance, but it made clear that the central bank is not prepared to declare victory in its inflation fight.
Inflation remains above the Fed’s target
Warsh’s argument rests on the gap between current inflation and the Fed’s 2% objective.
The 12-month change in the personal consumption expenditures price index, the Fed’s preferred inflation measure, stands at 3.7%. The six-month annualized change is 4.1%.
Other gauges point in the same direction, Warsh said.
The 12-month core PCE measure, which excludes volatile food and energy prices, is at 3.9%. The six-month annualized core PCE rate is 4.2%. The Consumer Price Index is up 3.4% over 12 months, while core CPI is running at 3.5%.
“None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2% target,” Warsh said.
The Federal Reserve’s target is not merely symbolic. It is meant to anchor expectations among households, businesses and investors.
If people believe prices will remain elevated for years, they may demand higher wages, set higher prices and make financial decisions that contribute to a self-reinforcing cycle of inflation.
That is why central bankers pay close attention not only to current price data but also to expectations about future inflation.
Warsh said recent data had been somewhat better than expected, including a decline in gasoline prices. But he argued that those figures did not show that underlying inflation had “meaningfully improved.”
The distinction between headline and underlying inflation is central to the Fed’s decision.
Gasoline, food and energy prices can change sharply from month to month. Policymakers tend to focus more heavily on broader measures of inflation that may better reflect persistent price pressure in services, housing, wages and consumer spending.
A firmer tone from the Fed chair
Warsh’s speech was widely seen as an effort to reinforce his inflation-fighting credentials.
The chair said the Fed bears responsibility for 65 months of sustained inflation above its target.
“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank, and that is where it belongs,” Warsh said in prepared remarks.
That statement was notable because it places the burden directly on the Fed rather than on outside forces such as tariffs, supply-chain disruptions, energy markets or fiscal policy.
Those factors can affect prices. But Warsh’s point was that the central bank remains responsible for setting monetary policy in a way that restores price stability.
The Fed’s benchmark interest rate is currently in a range of 3.50% to 3.75%. Warsh described the overnight policy rate as the “predominant tool” the Fed uses to achieve low, stable prices and support a healthy labor market.
At the Fed’s July meeting, policymakers voted 9-3 to leave rates unchanged. Three officials dissented in favor of a quarter-point increase — the largest number of dissenting votes for a rate hike since 2016.
The split showed that concerns about inflation were already building inside the central bank.
Warsh’s Jackson Hole remarks increase pressure on the Federal Open Market Committee to act if upcoming inflation data remain elevated.
“The chairman was very clear that he views the labor market as being at full employment, and that he views inflation as being stuck considerably above target,” Michael Strain, director of economic policy studies at the American Enterprise Institute, told Politico. “That suggests a standard policy response, which is to raise interest rates.”
The September meeting becomes a test
The Fed’s next meeting is scheduled for Sept. 15-16.
Before Warsh spoke, markets viewed a September rate increase as possible but not the most likely outcome. After the speech, investors shifted toward expecting a quarter-point hike.
CME futures pricing cited by Reuters showed the implied probability of a September increase rising to about 60%, compared with around 35% beforehand.
That does not mean a hike is certain.
The Fed will receive more important data before the meeting, including the August employment report and new inflation figures. Those reports could either reinforce Warsh’s concerns or show enough cooling to justify holding rates steady.
Warsh did not lay out a hard deadline for policy action.
Instead, he set a standard: the Fed must see clear, sufficiently rapid movement toward 2% inflation. If that does not happen, he said, policymakers will need to do more.
This approach gives the Fed flexibility but creates pressure on officials to explain what they mean by “work to do.”
A rate hike is the most obvious interpretation. The central bank could raise the federal funds rate by 25 basis points, moving its target range to 3.75% to 4.00%.
But the Fed could also tighten financial conditions through other mechanisms, including changes to the pace at which it reduces its balance sheet. Warsh’s comments focused on the policy rate, suggesting that interest rates remain the central tool under consideration.
The labor market gives the Fed room
One reason Warsh can emphasize inflation is his view that the U.S. labor market remains strong.
He said the economy is solid and the labor market is at full employment, according to accounts of the speech.
The Fed has a dual mandate: stable prices and maximum employment.
When unemployment is high or growth is weak, the central bank may hesitate to raise rates because higher borrowing costs can further slow hiring and spending.
But when the job market is healthy, policymakers have more room to focus on inflation.
Warsh’s assessment suggests that he does not see immediate economic weakness as a reason to delay action.
That view may be contested by other Fed officials.
Some policymakers could argue that rates are already restrictive, that higher long-term Treasury yields are slowing the economy and that additional increases risk unnecessarily weakening the labor market.
The debate will intensify as the September meeting approaches.
Treasury yields add another complication
Warsh has also had to contend with higher Treasury yields.
Long-term government borrowing costs have risen sharply, creating tighter financial conditions even without a Fed rate increase. When Treasury yields rise, mortgage rates, business borrowing costs and consumer loan rates often increase as well.
The question is whether the Fed should treat those higher long-term yields as a substitute for further tightening.
Before Jackson Hole, Warsh had suggested that rising yields had already tightened financial conditions. Investors wanted more clarity on whether he believed this reduced the need for additional rate hikes.
His speech emphasized that the Fed’s policy rate remains its main instrument.
That may reassure investors who worried that Warsh could rely too heavily on market-driven yield increases rather than making deliberate policy decisions.
But it also raises the possibility that the Fed could face a difficult combination: high long-term borrowing costs and a higher short-term policy rate.
That would increase pressure on housing, business investment, credit markets and federal debt-service costs.
The Fed’s job is not to finance the federal government cheaply. Its job is to control inflation and support employment.
Still, the bond market matters because its movements influence the real economy.
Warsh’s challenge is to prevent inflation from remaining elevated without triggering an unnecessarily sharp slowdown.
What higher rates would mean
A rate increase would affect Americans in uneven ways.
For savers, higher rates can mean better returns on savings accounts, money-market funds and certificates of deposit.
For borrowers, the effect can be more difficult.
Mortgage rates may remain high or rise further, adding to affordability challenges for homebuyers. Credit-card interest rates, auto loans, business loans and other forms of borrowing can also become more expensive.
Companies may delay investments if financing costs rise. Consumers may spend less on large purchases. State and local governments could face higher borrowing costs for infrastructure projects.
Those effects are the point of monetary tightening. The Fed raises rates to cool demand and reduce inflationary pressure.
But they can also slow growth and lead employers to reduce hiring.
The central bank must judge whether the risk of persistent inflation is greater than the risk of a sharper slowdown.
Warsh’s remarks suggest he believes inflation is the more immediate concern.
The global impact
U.S. Fed policy affects far more than the American economy.
Higher U.S. interest rates can strengthen the dollar, raise the cost of borrowing for foreign governments and companies, and pull capital toward U.S. assets.
Emerging-market economies may be particularly vulnerable. Countries with dollar-denominated debt may have to pay more to service their debt as the currency gains value.
A stronger dollar can also make U.S. exports more expensive overseas while lowering the dollar price of imported goods.
Central banks around the world will therefore watch the Fed’s September decision closely.
If the Fed raises rates, other countries may face pressure to keep their own rates higher to protect currencies and contain imported inflation.
If the Fed holds steady while inflation remains elevated, global markets may question whether the United States is doing enough to restore price stability.
A new communication style
Warsh’s Jackson Hole address also offered insight into how he intends to communicate as Fed chair.
He did not provide specific forward guidance. He did not say whether he would vote for a hike in September. And he did not set out an exact policy path for the rest of the year.
Instead, he focused on principles.
The Fed must get inflation to 2%. The labor market remains strong. Recent inflation data are not convincing enough. The policy rate remains the Fed’s main tool. And the central bank will have “work to do” if inflation does not improve.
That style may frustrate investors looking for certainty.
But it also reflects a broader concern among central bankers that excessive guidance can make markets dependent on official signals and limit policymakers’ flexibility when conditions change.
Warsh appears to be trying to establish a more conditional approach: the Fed will respond to the data, but the data must meet a demanding standard.
For markets, the message was hawkish even if it was not explicit.
What to watch next
The most important developments before the September meeting will be:
- The August jobs report, including payroll growth, wage gains and unemployment.
- New Consumer Price Index and PCE inflation data.
- Changes in energy and gasoline prices.
- Consumer spending and retail-sales indicators.
- Treasury yields and broader financial conditions.
- Public comments from other Fed officials.
- Futures-market expectations for the federal funds rate.
The Fed will also watch whether businesses and households expect inflation to remain high.
Inflation expectations can become a major problem if they begin to rise. If companies expect costs to keep climbing, they may raise prices faster. If workers expect higher living costs, they may seek larger wage increases.
Warsh’s speech was aimed, in part, at preventing that cycle from taking hold.
The Fed chair has not promised a September rate increase. But he has made clear that a continued failure to make progress on inflation will have consequences.
For investors, borrowers and households, the message is straightforward: the prospect of higher interest rates is back at the center of the U.S. economic outlook.