Warsh Warns of Further Rate Hikes as Inflation Persists

Federal Reserve Chair Kevin Warsh has warned that inflation may require more rate hikes. In his first speech at the Kansas City Fed's annual Jackson Hole symposium, Warsh said the central bank must be confident that underlying inflation is moving toward its 2% target at a sufficient pace.

Warsh emphasized that he would focus on responding to incoming data rather than signaling specific policy decisions in advance. He stopped short of saying whether he would support a rate increase at the Fed's September meeting, but his comments suggest that the central bank may need to do more to contain inflation.

The current federal funds rate is 3.5%-3.75%, and Warsh said it does not appear to be placing significant restraint on the broader economy. Credit and loan markets show limited evidence of policy restraint, and although he acknowledged signs of weakness in areas including housing and agriculture, Warsh described broad financial conditions as 'hard pressed' to describe as restrictive.

Warsh's assessment could strengthen the case for maintaining a restrictive policy stance or potentially raising rates if inflation fails to make further progress toward the Fed's target. He also highlighted the breadth of price increases across the economy, noting that about half of the items in the Fed's preferred inflation basket are increasing at an annual rate above 3%, compared with roughly one-third during the two decades before the pandemic.

The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, is currently running at 3.7%, well above the central bank's 2% target. Warsh also said inflation was more concerning for policymakers than the labor market, which he described as broadly robust.