In a highly anticipated speech at the annual Jackson Hole Economic Symposium on Friday, Federal Reserve Chair Kevin Warsh told the gathering of central bankers that inflation isn't slowing meaningfully and vowed to do what it takes to push it down to the target rate of 2%.
“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.”
Warsh reviewed the state of the economy, saying that business profits were strong and the labor market appears to be at or near full employment. Accordingly, Warsh said, the Fed needs to focus on the first part of its dual mandate, price stability.
Although Warsh has criticized the idea of the Fed providing forward guidance on its plans and did so again on Friday as he called for “a quieter Fed,” his comments were seen as a sign that the central bank is both worried and serious about fighting inflation, suggesting to many listeners that Fed officials would raise interest rates this year, perhaps as soon as September.
Warsh’s hawkish commentary sent the odds of a rate hike next month sharply higher, with investors pushing the probability of a hike from about 35% to more than 55% on the CME FedWatch tool.
A “hinge point in history”? Early in his remarks, Warsh raised the possibility that artificial intelligence is a revolutionary technology that could send the economic growth rate soaring.
“The potential for substantially higher growth is on the rise. Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts,” he said. “The Fed watches all of this attentively. We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy.”
Warsh has created a task force to study the issue. In previous comments, he suggested that a significantly higher growth rate could raise productivity, and thereby lower inflation by reducing costs.
What the analysts are saying: Market watchers seemed pleased that Warsh emphasized inflation – a focus that could set the central bank on a collision course with President Trump, who has long called for lower interest rates. Rates on short-term debt jumped after Warsh’s speech as investors weighed the odds of inflation-fighting interest rate hikes, while long-term rates stabilized.
Diane Swonk, chief economist at KPMG, said Warsh reassured investors that he is serious about inflation. “The speech was a move to restore confidence in the Fed ‘s independence and resolve on inflation amidst an economy that has surprised with its resilience,” she said on X.
“I would say Warsh was successful in reestablishing confidence,” said Larry Holzenthaler at Catalyst Funds, per Bloomberg. “He came across as very focused on inflation and bringing it back in line with the Fed’s 2% target. The market seems to be reacting exactly the way the Fed wants.”
Carl Weinberg, chief economist at High Frequency Economics, agreed that the speech was largely a success. “We believe that markets heard what they needed to hear to believe that Warsh will tighten monetary conditions to restrain inflation, and that he will encourage the [Federal Open Market Committee] to pull the trigger soon," he said in a research note, per ABC News.