Fed chairman Kevin Warsh signals central bank’s concern if above-target inflation persists

Federal Reserve Chairman Kevin Warsh indicated on August 28 that the US central bank may need to take action if policymakers remain uncertain about whether underlying inflation is moving toward the 2% target. Warsh stated that the Fed must be confident that inflation is decreasing at a sufficient pace, or they would "have work to do."

Short-term Treasuries declined as expectations of rate hikes in September increased to 46% from 35% in the previous day. Meanwhile, US stocks were stable, and the US dollar index rose. Warsh emphasized that short-term interest rates are the primary tool for achieving the Fed's dual mandate. He also acknowledged that recommendations from five task forces studying long-term issues would come later and would not impact current policy decisions.

Warsh noted that progress in reducing inflation has been modest, and recent data shows that about half of the items in the PCE basket of goods and services are increasing at more than 3% annually, which is below the rate seen during the pandemic but above the pre-pandemic norm. However, Warsh did not provide a specific timeline for rate hikes and explicitly stated that his remarks should not be taken as forward guidance or a reaction function for investors and Fed analysts.