Fed chair says inflation too high for too long, summer data shows no meaningful improvement

Warsh vows to block second- and third-round effects of oil-driven price pressures

Declines to signal consecutive hikes, says he will not prejudge future decisions

Federal Reserve Chair Kevin Warsh holds a press conference following the Federal Open Market Committee meeting on June 17 (local time). [AP]
Federal Reserve Chair Kevin Warsh holds a press conference following the Federal Open Market Committee meeting on June 17 (local time). [AP]

Federal Reserve Chair Kevin Warsh said Wednesday that the US economy has grown stronger in recent months and that current financial conditions are difficult to characterize as restrictive — remarks that could be read as leaving the door open to further tightening even after the Fed's first rate hike in more than three years. He drew a line, however, on whether the move marks the start of consecutive increases, saying he would not prejudge future decisions.

Speaking at a press conference following the Federal Open Market Committee meeting Wednesday (local time), Warsh said the decision "was made at a time when the US economy appears to be strengthening." He added that indicators including new hiring, private-sector income and business capital investment "have improved over the past few months and are pointing in a positive direction."

The Fed raised its benchmark interest rate by 25 basis points to a target range of 3.75 to 4.00 percent — its first increase since July 2023, a gap of three years and two months. All 12 voting FOMC members supported the move.

Warsh pointed to persistently elevated inflation as the primary driver of the decision. "Inflation has been above target for more than five years," he said. "The clear fact is that inflation has been too high and has lasted too long."

He said summer inflation data offered no reassurance. "The inflation readings this summer do not tell us that the underlying trend has improved in any meaningful way," he said. Citing recent Consumer Price Index and Producer Price Index data, Warsh estimated that the Personal Consumption Expenditures price index rose about 3.6 percent year-on-year in August, with multiple inflation categories running above 3 percent on both six-month and 12-month bases.

"Today's policy action will help return inflation to the committee's 2 percent goal more promptly," Warsh said. "We will achieve price stability."

He assessed the economy and labor market as resilient enough to absorb further tightening. The US unemployment rate remains low at around 4.1 percent, he said, with job openings and average weekly hours both rising. Recent unemployment claims are also consistent with full employment, and he described the employment side of the Fed's dual mandate as being in "good shape."

Warsh reaffirmed his view that financial market conditions are not restrictive. "It is difficult to describe broad financial conditions as tight," he said, adding that this assessment was widely shared among FOMC members at the meeting.

He said the rate increase removed "a dose of accommodation," adjusting financial and credit conditions to better align with the Fed's price stability mandate.

On supply shocks beyond the Fed's direct control — such as the surge in global oil prices driven by the war involving Iran — Warsh said the central bank would act to prevent such pressures from spreading across the broader economy.

"Whether it's oil or food, the Fed cannot influence individual prices," he said. "What we can do, and will do, is ensure that changes in relative prices do not spread through the broader economy and generate second- and third-round effects." The implication was that while the Fed cannot bring down high energy prices through interest rates, it will work to prevent rising energy costs from feeding into prices for other goods and services, wages and inflation expectations.

Warsh cited three factors behind the shift from a hold in July to a hike this time: the state of the economy, inflation and geopolitical developments.

He said economic data over the seven weeks since the last meeting confirmed that the US economy had strengthened. Inflation had also failed to improve enough to meet the bar he had set, and the Fed's assessment of geopolitical risks around the world had changed. He said these three factors together led to Wednesday's unanimous decision.

Warsh declined to give a clear answer on whether the hike would be followed by consecutive increases. Asked about the future rate path, he said, "I'm not in the forward guidance business," adding that he would "not prejudge any decision we make going forward."

He also reaffirmed his principle of not making policy decisions based on any single data point. "Trends matter," he said. "Data is noisy, and over-reliance on any individual indicator is a dangerous obsession."

The Summary of Economic Projections released Wednesday showed that the median year-end benchmark interest rate forecast among FOMC participants rose to 4.1 percent, up 0.3 percentage points from June — a signal that at least one more hike this year remains on the table, given that the current upper bound of the target range stands at 4.00 percent.

Warsh said he again did not submit his own rate forecast. Presenting the projections of FOMC participants, he said the US economy is expected to grow 2.3 percent this year and 2.4 percent next year, while PCE inflation is forecast to ease from 3.7 percent this year to 2.3 percent next year.

On the economic outlook, Warsh said "inflation risks are tilted to the upside, while labor market risks are broadly balanced" — a signal that the Fed's policy focus is likely to remain on price stability for now, given that he views inflation risks as greater than employment risks.


sjy@heraldcorp.com