September decision hinges on whether price pressures ease
Federal Reserve Chair Kevin Warsh has put the possibility of another US interest rate increase back in focus, using his Jackson Hole address to argue that inflation remains too high and that short-term rates remain the central bank’s main tool for bringing it under control.
The speech gave markets a clearer sense of Warsh’s policy stance ahead of the Fed’s next meeting in September, after his earlier public appearances left uncertainty over how he was weighing persistent price pressures against broader economic conditions.
Warsh did not commit to a rate move, but his remarks pointed to a higher bar for easing and left open the prospect of further tightening if inflation fails to moderate.
At the centre of his argument was the Fed’s 2 per cent inflation objective, which he described as a “firm, fixed target.”
The Fed’s preferred inflation measure, the personal consumption expenditures price index, was running at 3.7 per cent in July. Warsh also cited the consumer price index, which was up 3.4 per cent, as further evidence that inflation remains above the central bank’s comfort level.
Rather than relying on a single headline measure, Warsh said the Fed is looking across several indicators and at how broadly price pressures are distributed through the economy. He noted that 54 per cent of PCE components had recorded annualized inflation above 3 per cent over the previous 12 months, while 49 per cent were above that level over the past six months.
“None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target,” Warsh said.
Those comments marked a more explicit emphasis on inflation than Warsh offered after the Fed’s July meeting, when his answers left markets with less certainty over the direction of policy. That uncertainty was felt most clearly in longer-term bond markets, where investors adjusted yields to reflect a wider range of possible outcomes for rates.
“A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period,” Warsh said.
The September meeting will therefore hinge heavily on whether incoming data show that inflation is easing enough to reduce the case for further tightening.
Warsh also made clear that, if the Fed does need to respond, interest rates remain its primary tool, stating that “short-term interest rates are the predominant tool to achieve the dual mandate.” That emphasis marks a shift from some of his earlier policy arguments, which had also focused on issues such as AI-driven productivity gains and reductions in the Fed’s balance sheet.
At Jackson Hole, he separated those longer-term questions from current policy decisions.
A Fed task force examining the economic effects of AI was “encouraging,” Warsh said, but so far had “no bearing on decisions we make in the current policy conjuncture.” He also gave no indication that balance-sheet changes were about to become a major part of the Fed’s near-term policy response.
The speech therefore narrowed the immediate policy debate back to inflation, interest rates and the pace at which price growth returns towards target. But Warsh stopped short of offering firm guidance on what the Fed might do next, leaving incoming economic data to shape expectations ahead of the September meeting.
“We can be held accountable for delivering on our remit—the only true test of our credibility,” Warsh said.
Without a clearer signal on the timing of any rate move, bond yields and market expectations could remain sensitive to each new inflation reading in the weeks ahead.
Warsh’s position also puts the central bank at odds with President Donald Trump, who has continued to call for lower interest rates. Warsh did not address those demands directly in Jackson Hole.
