Federal Reserve Chairman Kevin Warsh indicated that inflation risks have receded in recent weeks, reiterating his commitment to bringing inflation back to the U.S. central bank's 2% target. Speaking at the European Central Bank’s annual Forum on Central Banking in Sintra, Portugal, Warsh stated that expectations of inflation had come down over the preceding four weeks. This message echoed a previous statement from his first press conference as Fed chairman last month, where he emphasized the central bank's dedication to delivering price stability.
However, Warsh's assessment of declining inflation risks contrasts with the concerns expressed by several other Fed officials. Ahead of Warsh's keynote speech at the Jackson Hole economic symposium, many officials voiced ongoing worries about the persistent and "sticky" nature of inflation. Kansas City Fed President Jeffrey Schmid, for instance, noted that the U.S. central bank's current policy rate, which was left in the 3.50%-3.75% range at the July 28-29 meeting, did not appear restrictive and that more action was needed to bring inflation down to 2%. Similarly, Cleveland Fed President Beth Hammack, who dissented in favor of a rate hike at the last meeting, stated that inflation has been above target for over five years and believes the Fed is unlikely to achieve its target even by next year, forecasting inflation to end this year around 3% and reaching mid-2% at best next year.
Chicago Fed President Austan Goolsbee also expressed significant concern that inflation is not under control, urging vigilance as it is difficult to eliminate once it rises. Boston Fed President Susan Collins, however, described recent inflation data as "mixed" but still anticipates gradual disinflation under a slightly restrictive monetary policy. The Personal Consumption Expenditures Price Index (PCE), the Fed's preferred inflation gauge, registered 3.7% year-over-year in July, matching June's level but down from 4.1% in May. Economists had mixed reactions to this data, with some advocating for a rate hike and others suggesting tightening might occur later in the year.
The broader context for Warsh's Jackson Hole appearance is heightened by a divergence in approaches with Treasury Secretary Scott Bessent regarding market intervention. Warsh advocates for markets to play a larger role in setting rates, while Bessent has taken steps to influence bond yields, such as doubling buybacks of longer-dated debt to at least $4 billion per weekly operation. This difference in philosophy, along with initial communication missteps by the Fed leadership, has put Warsh in a challenging position, with some analysts warning that a vague speech could lead to adverse market reactions, potentially pushing the 30-year Treasury yield to 5.5% or higher.
