US Federal Reserve Chair Kevin Warsh hints interest rate hikes may come as inflation ‘still too high’

United States Federal Reserve Chair Kevin Warsh in his keynote speech at the central bank's annual Jackson Hole Symposium in Wyoming today acknowledged that inflation in the country is “still too high”. He added that the Fed would fulfil its mandate to keep inflation under control, hinting that it may also undertake interest rate hikes if needed.

This was the first such signal from the new Fed chair, who took over in May this year. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” Warsh stated.

Notably, Warsh's term has been dogged by concerns over his focus on fighting inflation and these concerns have likely nudged bond yields higher, an AP report said.

‘A quieter Fed, more purposeful in its communications’

Notably, Warsh also stated that he doesn’t want to provide “forward guidance” as it limits the Fed’s flexibility by committing it to a specific policy. He believes “a quieter Fed, more purposeful in its communications, is better able to meet its objectives”.

Yet some economists have argued that he could say more about his views on Fed policy without tipping his hand about future actions, the AP report added.

But he did suggest that interest rates currently aren't restricting economic activity, pointing to robust business investment in AI equipment and infrastructure and strong consumer spending. As a rule of thumb, interest rates often need to be high enough to limit borrowing and spending to cool inflation.

The Fed's next policy meeting is between 15-16 September and Warsh's remarks don't necessarily signal the central bank will raise rates then. But his speech indicated that rates may not be high enough to bring inflation down to the Fed's 2% target, it added.

Inflation data more concerning that job market trends

Warsh said inflation data “are more concerning" than trends on the job market, where the unemployment rate is low. He also argued that inflation is unlikely to move back to the target on its own.

Warsh noted that in the past year, 54% of goods and services tracked by the government have seen price increases of 3% or higher. While that is down from the pandemic peak, it is “well above” the 32% that saw such increases in the two decades before the pandemic.

Inflation cooled in June and July after spiking in May from soaring gas prices, yet it remains above the central bank’s target. According to the Fed’s preferred measure, it was 3.7% in July.

Short-term interest rates the “predominant tool”

Warsh also sought to clear up some areas of confusion that arose after his remarks at a July 29 news conference. He specified that short-term interest rates are the “predominant tool” the Fed can use to lower inflation.

Previous Fed chairs have often used speeches at Jackson Hole to address broad questions about interest-rate policy and the economy, or to signal upcoming changes in their approach. In 2022, with pandemic-era inflation having soared to 9.1%, Warsh's predecessor Powell signaled the Fed would continue to sharply raise interest rates in a fight against runaway prices, and he acknowledged that such maneuvers would bring “pain” to consumers and businesses.

Most analysts expect the Fed will keep rates unchanged when it meets next in mid-September. Wall Street investors, however, are betting the central bank will hike rates by December, according to futures pricing tracked by CME FedWatch.

Fed's independence under scrutiny

Questions about Warsh’s approach have intensified amid US President Donald Trump’s continued calls for lower interest rates. While Trump has continued to defend Warsh, whom he appointed, the president has criticized other Fed officials for supporting higher rates.

Trump has also renewed his efforts to remove Fed governor Lisa Cook, who was appointed by former President Joe Biden. Replacing Cook would enable Trump to appoint a majority of the seven-member board. Trump tried to fire her last year but was temporarily blocked by the Supreme Court.

If Warsh does assuage some of these concerns, longer-term interest rates could decline slightly. Those rates have steadily risen in recent weeks because of a range of factors, including burgeoning U.S. government deficits and outsize borrowing by tech firms building AI infrastructure.

The rate on the 30-year Treasury bond reached the highest level in 19 years last week, prompting an unusual effort by Treasury Secretary Scott Bessent to buy back bonds and push the yields lower.

(With inputs from AP)