Federal Reserve Chairman Kevin Warsh expressed concern Friday about elevated inflation while hinting that interest rates could need to move higher if more progress isn't made on easing price pressures.
Warsh's closely watched remarks at the Fed's annual symposium in Jackson Hole, Wyoming, avoided committing either to forward guidance — or verbal cues about the Fed's intentions — or reaction function, the economic signals that would warrant an adjustment in rates.
However, he did acknowledge that inflation is running hot, saying, "while this summer's [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved."
"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job, our mandate and our charge to keep," he added.
Stock market indexes climbed after digesting the speech, delivered at 10 a.m. ET, while Treasury yields moved substantially higher. The policy-sensitive 2-year note soared nearly 8 basis points, or 0.08 percentage point, to 4.31%, its highest since late July.
Traders also raised the probability for a rate hike at the September policy meeting to 55.7%, or about 20 percentage points higher than a day ago, according to the CME Group's FedWatch tool.
Warsh "opened the door to a Fed rate hike. A hike probably won't come in September, but it will by October or December," said Heather Long, chief economist at Navy Federal Credit Union. "Warsh explicitly said this summer's encouraging inflation readings don't indicate 'meaningful' improvement on inflation. Bond markets reacted swiftly by pricing in a hike."
Warsh noted that "market prices show confidence that we will deliver price stability. And I can assure you they're right."
Aside from the inflation concerns, which he said should be the Fed's primary focus, Warsh largely expressed confidence in the economy which he said "appears to have strengthened."
As he has done previously, the chairman cited benefits from artificial intelligence and said business and consumer spending has held up well. While acknowledging a slowdown in hiring, he attributed that to a flattening labor supply.
Warsh also used the speech to outline his philosophy on policymaking while carefully sidestepping any signals on what he thinks should be done to achieve the Fed's dual mandate of low inflation and full employment.
"I stand here today committed to a discipline, not to a decision," Warsh said in prepared remarks for a group that includes his fellow policymakers on the Federal Open Market Committee as well as economists and media members.
The chairman has been criticized for being cagey about his approach to policy at a time when inflation continues to run well above the Fed's 2% goal. He has opposed the prior use of forward guidance as hand-holding for markets that should be interpreting data, not Fed rhetoric.
Early in the speech, titled "In Our Time," he quipped that, "You can call it an outline, you can call it a trail map, just don't call it forward guidance," a practice that he said "has overstayed its welcome."
However, the broader message was in seeking a change in approach to how the Fed sees its role with the market and the public.
