Fed Chair Warsh Signals Possible Rate Hikes if Inflation Stays Stubborn

Federal Reserve Chairman Kevin Warsh used his keynote address at the Jackson Hole economic symposium on Friday to deliver his most explicit warning yet that interest rate hikes could be on the table if inflation does not show convincing signs of easing.

"Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said in prepared remarks.

His comments acknowledged that recent price data has been disappointing. Inflation, as measured by the Fed's preferred Personal Consumption Expenditures Price Index, stood at 3.7% annually in July. Warsh noted that "progress over the past two years has been modest" and that current readings "do not tell me that underlying trends have meaningfully improved."

While much of the 16-page speech focused on long-term issues like artificial intelligence, Warsh made several key acknowledgements about the current policy stance. He stated that "short-term interest rates are the predominant tool to achieve the dual mandate" and observed that financial markets show "few signs of policy restraint" despite the Fed's policy rate remaining unchanged since December.

The Fed chief also emphasized the importance of market signals, saying the central bank "needs clear market signals, as unfiltered as possible" to set proper monetary policy. He stressed that inflation expectations remain anchored but must be "closely minded."

Warsh explicitly declined to provide forward guidance or a detailed reaction function, saying such precision would be neither appropriate nor possible. However, his remarks come as investors increasingly price in the possibility of rate increases, with markets assigning a high probability of a hike by December.

The Fed's next policy meeting is scheduled for September 15-16, with key August employment and inflation data due for release in the coming weeks.