‘We have work to do’: Warsh says inflation is Fed’s main focus

Federal Reserve Chairman Kevin Warsh said in a highly anticipated speech on monetary policy that the central bank is focused on lowering inflation, a stance that could please markets but might bring him into conflict with President Donald Trump’s expressed desire for lower interest rates.In the closely watched speech at the Jackson Hole Economic Policy Symposium, Warsh indicated that the Fed is more focused on the inflation side of its dual mandate, even as the labor market slows. He also acknowledged the difficult situation facing the economy. “Here is my standard: we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do. That’s our job, our mandate, and our charge to keep.”Warsh pointed out that inflation is running too hot across several gauges, including the consumer price index and the personal consumption expenditures price index, which is the Fed’s preferred indicator.“None of these measures are perfect, but they all tell a similar story: inflation is running above our 2% target,” the chairman said. “So the Fed’s predominant focus right now should be on prices.”Inflation held at 3.7% for the year ending in July, the Bureau of Labor Statistics said this week in an update to the PCE gauge. CPI inflation fell one-tenth of a percentage point in July to 3.4%, and last month alone it rose only 0.1%. During the speech, Warsh said the Fed under his chairmanship remains committed to its existing target of 2% long-run inflation. Some have questioned the 2% target in recent years, but Warsh affirmed it during the Friday morning gathering.Treasury yields rose directly after his speech.He said there “should be no misunderstanding” that the “Fed’s price-stability objective of 2%, as measured by the personal consumption expenditures price index, is a firm, fixed target.”“Let’s be equally clear about another aspect of the objective: price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed’s job to deliver stable prices,” the chairman added.The commitment to lowering inflation — which many expect will include an interest rate hike this year — runs counter to Trump’s wishes that the Fed would do the opposite and cut interest rates.Trump assailed former Fed Chairman Jerome Powell for not lowering rates, but has so far held off on attacking Warsh, instead blaming the overall Fed monetary policy committee that votes on rate decisions.But with the speech, Warsh firmly indicated that he is in the camp of policymakers who think inflation and bringing it down is of utmost importance for the central bank.During the speech, Warsh also spoke about his aversion to so-called “forward guidance,” in which the Fed indicates its expectations for interest rates, unemployment, and economic growth in the coming years.Warsh noted that forward guidance was introduced amid the global financial crisis and was “essential” at the time, but argued the practice has “overstayed its welcome.”“Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray,” he said. “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.”The chairman also said that the use of forward guidance might have had the opposite of its intended effect, making inflation worse when it first surged a few years ago.FISCAL HAWKS SKEPTICAL OF BESSENT’S CLAIM THAT US CAN ‘GROW OUR WAY OUT’ OF $40 TRILLION DEBT“I’m not alone in noticing that forward guidance in 2021, to cite one example, might well have slowed the policy response to high inflation,” Warsh said.The Fed chairman’s speech at Jackson Hole is perhaps the most closely watched speech Fed chiefs give every year. Markets were largely flat following this year’s speech.