Federal Reserve Chairman Kevin Warsh indicated on Wednesday that inflation risks have lessened in recent weeks, though he remained non-committal regarding the possibility of interest rate hikes. Speaking at a European Central Bank conference in Sintra, Portugal, Warsh stated that inflation risks “have come down” but emphasized that further action is necessary.
"If there were people in households, the business sector, the financial markets, who thought that this central bank was gonna be comfortable with an inflation objective above 2%, I guess they’d be disappointed,” Warsh said. “We’re gonna deliver price stability in the US.”
Such a stance would imply interest-rate hikes, a departure from the previous year when Warsh advocated for faster rate cuts. The economic climate has since shifted, with higher energy prices contributing to inflation exceeding 4% and a resilient labor market.
When questioned about whether current inflation necessitates a response from central bankers, Warsh replied, “I’m not going to make a judgment now.” He added, “There’s a lot of late breaking news on a series of these things. When we get into that room and shut the door, we’re going to have a good debate.”
Warsh has previously argued that financial markets function best when reacting to data rather than the Fed's interpretations, and he dismissed concerns that a less communicative Fed might leave markets uncertain. "I hear this as if people don’t understand. I think they understand quite well,” he stated.
Following his remarks, traders estimated a 30% probability of the Fed raising interest rates at its July 29 meeting, a significant increase from 6% a month prior, according to CME FedWatch. The market consensus currently leans towards maintaining the current interest rate range of 3.5% to 3.75%. A strong June jobs report, scheduled for release on Thursday, could bolster arguments for a rate increase.
In line with his efforts to reduce forward guidance, Warsh mentioned that the Fed’s “dot plot” projections would continue for “a short time at the very least,” but one of five new task forces will review them. The previous “dot plot” indicated that nine of 19 Fed officials foresaw at least one rate hike by year's end, up from only one official in March. Warsh himself did not participate in those projections.
Warsh also briefly commented on a recent Supreme Court ruling that protected Fed Governor Lisa Cook from being fired without cause. “We were doing so well,” Warsh joked, adding, “So before the Supreme Court, the Fed acted independently and followed its remit. After the Supreme Court ruling, the Fed will continue to do so.” The Supreme Court's decision clarified that Fed policymakers are protected from termination without cause, though in a separate case, it ruled that officials at other regulatory agencies could be dismissed for any reason.