Kevin M. Warsh, the chairman of the Federal Reserve, sought to alleviate concerns about his commitment to taming elevated inflation, suggesting in a closely watched speech on Friday that the central bank would have “work to do” if price pressures did not ease in a timely fashion.
Mr. Warsh, delivering his first address to the world’s leading economic policymakers at the Fed’s annual conference in Jackson, Wyo., affirmed that the central bank was chiefly focusing on getting inflation down after half a decade of its overshooting the Fed’s 2 percent target.
The Fed will not waver on that goal, Mr. Warsh said, although he stopped short of revealing whether the current moment required higher interest rates.
“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank — and that is where it belongs,” he said in prepared remarks.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Mr. Warsh added. “Otherwise, we have work to do.”
Mr. Warsh made clear that adjustments to the Fed’s overnight rate, which stands at 3.5 percent to 3.75 percent, were the “predominant tool” to achieve both low, stable prices and a healthy labor market.
“Price stability is not self-executing,” Mr. Warsh said.
In the wake of Mr. Warsh’s speech, two-year Treasury yields, which are sensitive to changes in interest rate expectations, rose to their highest level in roughly a month. Stocks, which typically slide in response to higher interest rates, edged lower. Investors now see nearly even odds that the Fed will raise rates by a quarter of a percentage point at its next gathering in September.
The comments are Mr. Warsh’s most extensive to date about the economy since he took over the Fed’s top job in May amid a confluence of risks. They range from a protracted Iran war that has worsened the trajectory of inflation to rising Treasury yields that recently prompted surprise interventions by Treasury Secretary Scott Bessent.
Mr. Warsh struck an upbeat tone about the prospects of “substantially higher growth,” saying the potential for it was “on the rise.” He cited the “ever-expanding pools of capital” that were being deployed to expand artificial intelligence abilities.
Mr. Warsh also noted pockets of weakness, in sectors like housing and agriculture, but concluded that he would be “hard-pressed to describe broad financial conditions as restrictive.”
Perhaps most important, he seemed to downplay recent progress on reducing inflation, despite two months that showed slightly less acute price pressures. “They do not tell me that underlying trends have meaningfully improved,” he said of inflation data this summer. Moreover, he suggested that with the labor market “quite stable” and inflation running above target, “the Fed’s predominant focus right now should be on prices.”
“If you’ve just indicated your predominate concern is inflation that’s too high, then your statement about financial conditions gives a pretty clear indication of which way you’re leaning — a greater likelihood the next move will be a hike rather than a cut,” said David Wilcox, a senior fellow at the Peterson Institute for International Economics and a former leader of the Fed’s research and statistics division.
“All that is a pretty stark turn from his July press conference,” added Mr. Wilcox, who is also the director of U.S. economic research at Bloomberg Economics.
In his first months at the helm, Mr. Warsh has made it a priority to emphasize the Fed’s intolerance for inflation. But up until this point, he has not given a clear sense of how he views the drivers of the inflation he wants to root out or what it might take from a policy standpoint to do so. That approach, which Mr. Warsh employed after the Fed’s most recent meeting in July, set off a swift rebuke from markets.
Mr. Warsh’s obscurity is by design. It reflects his strategy to recast how the Fed communicates. Unfettered transparency from past leaders, he has argued, has muddied an important signal officials would otherwise have gleaned from financial markets. It has also left officials too bogged down by the near-term rate decisions that Mr. Warsh believes are less relevant than the overall arc of central bank policy.
Investors say this framing misses the fact that expectations about what the Fed is going to do factor heavily into how markets behave. In fact, a significant portion of the recent move in Treasury bond yields stems from the fact that the central bank, once thought to be lowering rates this year, appears more inclined to raise them.
Mr. Warsh on Friday did not endorse a specific policy move at either the Fed’s next meeting or beyond that point. He defended his decision to keep close to his chest his preferences on the path forward for rates.
“Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses and households astray,” he said in his critique of the Fed’s practice of providing forward guidance. “And I believe when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it’s time to decide.”
Investors, he added, will always try to anticipate what the Fed will do next. “But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”
William English, a Yale professor and a former director of the Fed’s division of monetary affairs, said Mr. Warsh’s speech gave some ground to the idea that it was to central bankers’ benefit to provide details on their thinking about the economy and what they might need to do to achieve their goals.
“There’s a gray area of what’s forward guidance and what isn’t,” said Mr. English. “He’s been a forward guidance hard-liner until today.”
Mr. Warsh’s colleagues have more readily embraced the possibility of higher rates. In fact, a growing group of policymakers have argued that the central bank should already have raised borrowing costs to hasten progress on getting inflation down. They maintain that rates are doing little to hold back economic activity and, in turn, counteract inflationary pressures, which are now emanating from a variety of sources.
The war with Iran is no closer to a resolution, keeping energy prices high. Computer chips and semiconductors, among other items, have become expensive with the splurge of A.I.-related spending. And President Trump has waded into new trade wars; the latest target is Canada. While the bulk of these sources of inflation are out of the Fed’s control, the central bank has the ability to influence the intensity of demand across the economy, which enables it to achieve its goals.
A failure to act now, these policymakers warn, could mean the Fed is eventually forced to raise rates more aggressively than otherwise would have been the case, imperiling a labor market that remains on slightly shakier footing than it was on at the start of the year.
However, this cohort has yet to convince a majority of officials, who are still holding out hope that their forecasts of easing inflation in the second half of the year are going to bear out, thereby obviating the need to raise rates. If that progress does not materialize, these officials have said they will support higher rates.
On Wednesday, new data from the Commerce Department indicated the Fed’s preferred gauge — the Personal Consumption Expenditures Price index — showed little improvement in July.
Core prices, a measure that strips out the volatile food and energy categories, were up 3.3 percent from a year earlier, unchanged from June, after a 0.2 percent monthly increase. The Fed pays closest attention to the core measure because it is seen as a reliable indication of the trajectory of inflation in the months ahead.
How the Fed measures and models inflation is the focal point of one of the five task forces Mr. Warsh convened earlier this year to look at issues core to the central bank. The other groups — all of which are being led by a slate of external advisers spanning former policymakers, academics and business leaders — include how the Fed communicates, its $6.7 trillion portfolio of government debt and mortgage-backed securities, the data sources it prioritizes and productivity trends and jobs.
Mr. Warsh set up the task forces, whose work is set to be completed by the end of the year, to be unconstrained in their scope and scale. But Mr. Warsh has in the past indicated his preferences.
For example, he has long championed a smaller Fed balance sheet, arguing that past interventions not only stoked inflation, but also distorted financial markets and eroded the central bank’s independence by veering it into fiscal policy. He has also maintained that the proliferation of A.I. is going to lead to significant productivity gains that over time will support stronger growth without stoking inflationary pressures.
On Friday, Mr. Warsh said that the recommendations of the task forces would have “no bearing on decisions we make in the current policy conjuncture.”
“But I believe that for future policy challenges, this intellectual investment today will leave us far better prepared,” he added.
