At his first marquee appearance as chair in Jackson Hole, Kevin Warsh said recent cooling in inflation hasn't convinced him that the trend has "meaningfully improved." He underscored that price growth is still above the Fed's 2% target and hinted borrowing costs may need to rise in the months ahead, while not suggesting a move is imminent. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," he said. "Otherwise, we have work to do."
Warsh described inflation data as "more concerning" than labor trends, noting unemployment remains low and saying inflation is unlikely to return to target on its own. He noted that in the last year, a majority of the government-tracked items registered price gains of at least 3%. Following a May jump tied to pricier gasoline, inflation eased in June and July, yet the Fed's preferred gauge still came in at 3.7% in July.
Warsh took over as chair in late May after Jerome Powell's term ended.
Warsh stuck with his skepticism about offering advance policy signals, arguing that "forward guidance" can lock the Fed into a path and reduce flexibility. He reiterated that short term interest rates are the Fed's "predominant tool" and said the central bank continues to use the same inflation gauge it has long followed. He also suggested current rates aren't biting much, citing robust spending by firms on AI gear and data-center buildouts alongside steady household demand.
That clarification followed confusion after his July 29 press conference about the Fed's inflation metrics and preferred tools. Some economists still want more detail on his framework without specifics on timing. Jon Faust, a Johns Hopkins economist and former adviser to Powell, said Warsh managed to communicate that he would support raising rates if needed, addressing a key concern. Michael Strain of the American Enterprise Institute noted Warsh has used tough rhetoric before without a follow through hike and said Friday's remarks did not pinpoint timing.
Debate over Warsh's approach has intensified as President Donald Trump continues to call for lower interest rates. Trump has defended Warsh, whom he appointed, while criticizing other Fed officials who support higher rates. He has also revived a push to oust Fed Governor Lisa Cook, whom former President Joe Biden appointed.
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Last year, Trump attempted to dismiss her; the Supreme Court temporarily stopped the move. If Cook were replaced, Trump could name enough members to control a majority of the seven member board.
Fixed income traders took the hint. The two-year Treasury yield, which closely tracks expectations for the Fed's policy rate, climbed to 4.30% from 4.22% after Warsh spoke. By contrast, 10-year and 30-year yields were largely flat, suggesting markets do not see a long stretch of much higher rates. Stocks were steady.
Traders now view the Sept. 15-16 meeting as a coin flip for a rate increase, up from about one third before the speech, based on CME FedWatch pricing. Even so, Warsh's comments are not a definitive indication the central bank will hike at that gathering. The Fed's short term policy rate is about 3.6%.
Longer-term yields had already been grinding higher on widening federal deficits and substantial debt issuance by technology companies expanding AI infrastructure. The 30-year Treasury yield hit a 19-year high last week, prompting Treasury Secretary Scott Bessent to undertake an unusual bond buyback to push yields lower.
Short term yields moved up because investors heard a chair who still puts inflation front and center and is open to acting if needed. Long yields holding steady imply markets are not betting on years of elevated rates. If inflation cools further, that balance could shift; if not, borrowing costs could stay elevated and feed through to mortgages, auto loans, and savings yields.
The next Fed meeting is Sept. 15-16, and fresh data between now and then will shape expectations for what comes next. Keep an eye on how those numbers flow into your everyday costs, not just the stock ticker.
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