Federal Reserve Chair Kevin Warsh said Friday that inflation remains too high and suggested the central bank may have to raise interest rates in the coming months to bring it down — a clearer signal about his economic outlook than he had sent previously.

Delivering his first high-profile speech at the Fed’s annual conference in Jackson Hole, Wyoming, an event hosted by the Federal Reserve Bank of Kansas City, Warsh acknowledged that recent U.S. reports show inflation has cooled a bit, but “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,” Warsh said. “Otherwise, we have work to do.”

The comments from the new Fed chair appeared to reassure Wall Street that fighting inflation remains the central bank’s priority. Warsh did not imply that a rate hike is imminent, but he appeared to dismiss perceptions that inflation is no longer a threat, pointing to data showing it remains stubbornly above the Fed’s 2% target. Warsh replaced Jerome Powell in late May after his predecessor’s term ended.

Markets React

The U.S. stock market held steady after the speech, but expectations are building in the bond market for the Fed to hike interest rates. The yield on the two-year Treasury, which closely tracks expectations for what the Fed will do with its federal funds rate, moved from 4.22% to 4.30% — a sign that investors expect short-term yields to move higher.

Longer-term yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors aren’t worried that higher rates will be needed for a long stretch of time to fight inflation.

Economists Divided

Jon Faust, an economist at Johns Hopkins and a former adviser to Powell, said Warsh succeeded in conveying a tougher approach on inflation while avoiding the kind of detailed guidance from the Fed that he has disparaged.

“He found a way to convey that if necessary he would support raising rates, which is one thing people were concerned about,” Faust said.

Michael Strain, director of economic policy studies at the American Enterprise Institute, offered a more cautious reading, noting that the Fed chair has talked tough on inflation before without hiking the Fed’s key rate. He added that Friday’s remarks don’t provide any clearer guidance on the timing of any Fed moves.

The Forward Guidance Debate

The Fed chair faced high stakes with his speech as questions swirl around Wall Street about his focus on fighting inflation. Those concerns may have contributed to rising bond yields, which can increase the cost of borrowing for the government and everyone else.

Warsh has said he doesn’t want to provide what analysts call “forward guidance” about whether the Fed will hike or cut rates or stay on hold at upcoming meetings, arguing that it limits the Fed’s flexibility by committing it to a specific policy. Yet some economists have argued he could say more about his views on Fed policy without tipping his hand about future actions.

On Friday, Warsh reiterated his skepticism about providing such guidance, or even about outlining his broad approach to interest-rate policy. He did suggest, however, 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 in order to cool inflation.

What Comes Next

The Fed next meets Sept. 15–16, and Warsh’s remarks don’t necessarily signal that 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.

The Fed is charged by Congress with pursuing both stable prices and maximum employment, and Warsh said inflation data “are more concerning” than trends in the job market, where the unemployment rate is low, and he argued that inflation is unlikely to move back to the target on its own.

He 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 inflation gauge — the personal consumption expenditures, or PCE, price index — inflation ran at 3.7% in July.

Warsh also sought to clear up some areas of confusion that arose after his remarks at a July 29 news conference, specifying that short-term interest rates are the “predominant tool” the Fed can use to lower inflation. The federal funds rate, the central bank’s benchmark for overnight lending between banks, feeds through to borrowing costs across the economy, from credit cards and auto loans to adjustable-rate mortgages.

Jackson Hole Precedent

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%, 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.

Wall Street investors now see the chances of a rate hike at the Fed’s Sept. 15–16 meeting as basically a coin flip, according to futures pricing tracked by CME FedWatch, up from about one-third before Warsh spoke.

Political Pressure

The Federal Reserve is structured to set monetary policy independently of the White House. Questions about Warsh’s approach have intensified amid 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.

Bond Market Backdrop

Longer-term 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 yields lower.

Source: Fortune