Warsh Says Fed Has “Work to Do” If Prices Don’t Fall. They Won’t. Rate Hikes Are Coming

Fed Chair Kevin Warsh told a gathering in Wyoming that the central bank needs to tighten financial conditions if inflation doesn't fall quickly enough. July's personal consumption expenditures (PCE) inflation reached 3.7%, nearly double the Fed's 2% target. Core PCE, which strips out food and energy, rose 3.3%. Warsh's remarks signaled a shift in the Fed's stance, as he emphasized that policymakers have work to do if inflation doesn't move toward the 2% target quickly.

The Federal Reserve is struggling with inflation remaining well above its 2% target, while several factors contributing to higher prices are still in place. The Fed must also contend with the Treasury Department, which has doubled long-term Treasury buybacks and is considering using the roughly $1 trillion cash account for additional purchases.

These actions aim to lower longer-term yields, which creates an obstacle for the Fed in tightening financial conditions. While energy prices have shown some relief, geopolitical risks could push them higher again. The Fed's September meeting is unlikely to produce an immediate rate hike, but if inflation remains around 3% or higher while energy and tariff pressures persist, a rate increase before year-end becomes increasingly likely. Investors should prepare for higher-for-longer rates rather than assuming inflation will fade away.