JACKSON HOLE, Wyo. (AP) — Federal Reserve Chairman 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 than it had previously sent about its economic outlook. In his first high-profile speech at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Warsh acknowledged that recent reports from the United States show inflation has cooled a little, but “they don’t tell me that the underlying trends have slowed significantly.” “We need to be confident that core inflation is moving toward our target, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do.” The new Federal Reserve chair’s comments appeared to reassure Wall Street that fighting inflation remains the central bank’s priority. Warsh did not imply that a rate hike was imminent, but seemed to dismiss the perception that inflation is no longer a threat. He pointed to data showing inflation remains stubbornly above the central bank’s 2% target. Warsh replaced Jerome Powell in late May after his predecessor’s term ended. The US stock market was stable after the speech, but expectations are rising in the bond market that the Federal Reserve will raise interest rates. The two-year Treasury yield, which closely tracks expectations about what the Federal Reserve will do with its federal funds rate, rose from 4.22% to 4.30%, a sign that investors expect short-term yields to rise. Long-term yields on 10- and 30-year Treasury bonds were mostly stable, suggesting investors are not concerned that higher rates will be needed for a long period of time to combat inflation. Jon Faust, a Johns Hopkins economist and former Powell adviser, said Warsh managed to convey a tougher approach on inflation while avoiding the kind of detailed guidance from the Federal Reserve that he has disparaged. “He found a way to convey that, if necessary, he would support raising rates, which is something people were concerned about,” Faust said. However, Michael Strain, director of economic policy studies at the American Enterprise Institute, said the Federal Reserve chair has talked tough about inflation before without raising the Fed’s key rate. His comments on Friday do not provide any clearer guidance on the timing of any Fed action, he added. Subscribe to Morning Wire: Our flagship newsletter breaks down the day’s biggest headlines. The Federal Reserve chair faces high stakes with his speech as doubts swirl on Wall Street about his approach to fighting inflation. Those concerns may have contributed to rising bond yields, which may increase the cost of borrowing for the government and everyone else. However, Warsh has said he does not want to offer what analysts call “forward guidance” on whether the Federal Reserve will raise or lower rates or remain on hold at upcoming meetings. He argues that it limits the Federal Reserve’s flexibility by committing it to a specific policy. However, some economists have argued that it could say more about their views on Federal Reserve policy without revealing future actions. Warsh on Friday reiterated his skepticism about providing such guidance or even outlining his broad approach to interest rate policy. But he did suggest that interest rates are not currently constraining economic activity, pointing to strong business investment in AI equipment and infrastructure and strong consumer spending. As a general rule, interest rates often need to be high enough to limit borrowing and spending to cool inflation. The next Federal Reserve meeting will be on September 15-16, and Warsh’s comments do not necessarily indicate that the central bank will raise rates at that time. But his speech indicated that rates may not be high enough to reduce inflation to the Federal Reserve’s 2% target. Warsh said the inflation data “is more concerning” than trends in the labor market, where the unemployment rate is low. He also argued that inflation is unlikely to return to target on its own. Warsh noted that in the last year, 54% of goods and services tracked by the government have seen price increases of 3% or more. While that figure is lower than the peak of the pandemic, it is “well above” the 32% who experienced such increases in the two decades before the pandemic. Inflation cooled in June and July after soaring in May due to rising gas prices, but remains above the central bank’s target. By the Federal Reserve’s preferred measure, it was 3.7% in July. Warsh also sought to clear up some areas of confusion that arose after his comments at a July 29 press conference. He specified that short-term interest rates are the “predominant tool” that the Federal Reserve can use to reduce inflation. Previous Federal Reserve chairs have often used Jackson Hole speeches to address broad questions about interest rate policy and the economy, or to signal upcoming changes in their approach. In 2022, when pandemic-era inflation had soared to 9.1%, Powell signaled that the Federal Reserve would continue to sharply raise interest rates in a fight against runaway prices, acknowledging that such moves would bring “pain” to consumers and businesses. Wall Street investors now view the chances of a rate hike at the Federal Reserve’s Sept. 15-16 meeting as basically a coin flip, according to futures prices tracked by CME FedWatch, compared with about a third before Warsh. speak. Questions about Warsh’s approach have intensified amid President Donald Trump’s continued calls to lower interest rates. While Trump has continued to defend Warsh, whom he appointed, the president has criticized other Federal Reserve officials for supporting higher rates. Trump has also renewed his efforts to remove Federal Reserve Governor Lisa Cook, who was appointed by former President Joe Biden. Replacing Cook would allow Trump to appoint a majority of the board’s seven members. Trump tried to fire her last year, but the Supreme Court temporarily blocked him. Long-term rates have risen steadily in recent weeks due to a variety of factors, including rising U.S. government deficits and massive borrowing by tech companies building artificial intelligence infrastructure. The 30-year Treasury bond rate hit a 19-year high last week, prompting an unusual effort by Treasury Secretary Scott Bessent to buy back bonds and drive down yields.
