Warsh warns against reading rate signals from 'prices too high' remark

Rejects forward guidance, signals gradual balance sheet reduction

Makes international debut at ECB forum in Sintra

Federal Reserve Chair Kevin Warsh arrives for a morning session of the European Central Bank forum in Sintra, Portugal, on Tuesday. [Reuters]
Federal Reserve Chair Kevin Warsh arrives for a morning session of the European Central Bank forum in Sintra, Portugal, on Tuesday. [Reuters]

Federal Reserve Chair Kevin Warsh said Tuesday that inflation risks in the United States have receded and that inflation expectations have also come down. The remarks appeared to push back against market bets that the Fed could raise its benchmark interest rate before year's end, though Warsh cautioned against drawing any conclusions about the path of monetary policy.

Speaking as a panelist at the European Central Bank's annual forum in Sintra, Portugal, Warsh said inflation expectations had fallen over the past four weeks and that inflation risks had similarly eased. Analysts widely interpreted the comments as reflecting the rapid stabilization of global oil prices after the United States and Iran entered a truce, which in turn pulled down inflation risks and the broader outlook.

Warsh said the spike in oil prices during the period of conflict could "be observed in the short term on the demand side," but added that it was the central bank's job to determine whether the move was truly "inflationary" — and that the key question was whether it spread "broadly across goods as a whole."

Even so, Warsh said, "when you look around, you can see that prices are too high," and suggested he was not alone among the central bank governors on the panel in reaffirming a commitment to achieving price stability.

He added that anyone who thought the Fed would be content to target inflation above 2 percent "will probably be disappointed."

The Fed's inflation target is 2 percent. The Personal Consumption Expenditures price index — the central bank's preferred inflation gauge — rose 4.1 percent year-on-year in May, its highest reading in more than three years, though that figure does not yet reflect the recent drop in oil prices.

The remarks left the door open to a rate increase. When the moderator asked whether President Donald Trump — who appointed Warsh — was pressing for rate cuts, Warsh said, "We are an independent central bank," adding, "There will be no change in that."

Asked whether his "prices are too high" comment signaled a rate hike at the Federal Open Market Committee meeting scheduled for July 28-29, Warsh declined to answer. "You're trying to get me to break a principle, but that's not going to happen," he said — reaffirming his stated intention to scrap the Fed's practice of forward guidance, under which the central bank signals the future direction of monetary policy.

Warsh said FOMC members hoped to meet in four weeks for what he called "a good family fight," adding: "When we walk into that room and close the door, we'll have a good debate — but there isn't much more I can say beyond that right now." The remarks underscored his wariness about prejudging the outcome of the meeting.

Warsh also reiterated his view that the Fed's balance sheet must be reduced. He noted that repeated rounds of quantitative easing — in which the Fed bought government bonds and mortgage-backed securities to inject liquidity and push down long-term interest rates — had swollen the balance sheet to $6.7 trillion, and that its size had grown unwieldy.

"It took about 18 years to get to a balance sheet this large," he said. "Quantitative easing has come close to the territory of fiscal policy. It will take considerably longer than 18 weeks to bring it down to an appropriate size." The comments pointed to a gradual, not rapid, reduction.

He went on to say that interest rates — not asset purchases — should be the primary tool of monetary policy, and that rate adjustments, which affect market rates broadly, were "the policy instrument applied most fairly to all people."

On artificial intelligence, Warsh called its rapid rise "a massive paradigm shift for how we conduct policy and for the economy as a whole," comparing the current moment to "the first or second inning" of a baseball game.

"When the internet first appeared, who knew it would create 1.5 million jobs like Uber drivers?" he said, rebuffing concerns about AI-driven job losses and predicting that AI would ultimately create more employment.

The Sintra forum marked Warsh's first appearance on the international stage since taking office. Also on the panel were European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem.


yckim6452@heraldcorp.com