Fed Chair Warsh signals inflation remains elevated, market raises rate hike odds to 60 percent

Federal Reserve Chair Kevin Warsh said at Jackson Hole on August 28 that inflation is running above the Fed's 2 percent target and "there is still work to do," underscoring the central bank's continued focus on prices even as questions persist about whether that commitment will translate to policy action. Warsh stated that "the responsibility for 65 months of sustained elevated inflation sits squarely with the Central Bank." He said "we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." He also noted that the labor market looks "stable" and said this made prices "more concerning." Regarding recent inflation data, Warsh said summer readings were "better than expected, they do not tell me that underlying trends have meaningfully improved." Warsh said he is not committed to a rate hike but is not ruling it out, signaling the Fed views ongoing concerns about inflation as real. The chief tool for tackling inflation is rate hikes, Warsh underscored. He also stated that financial conditions or borrowing conditions right now do not seem "particularly restrictive," which matters because the Fed believes it will have to restrain lending and slow the economy to bring inflation down. Before Warsh's speech, investors in interest rate futures markets were pricing in about a one-third chance of an interest rate increase next month; after his speech, that probability moved to about 60 percent, according to Nick Timiraos, Wall Street Journal chief economics correspondent. The Fed had cut interest rates at six meetings over the prior two years. Warsh reiterated his preference for what he called a "quieter Fed," moving away from former Fed Chair Jerome Powell's use of "forward guidance." Warsh said "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."