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Fed’s Warsh stresses price stability and questions restrictive policy stance

Warsh said the current 3.5% to 3.75% policy rate may not be restrictive enough, pointing to strong capital spending, healthy corporate profits, and tight credit spreads.

Reported · Written up by our desk · Central Banks

Fed Chair Kevin Warsh, speaking at Jackson Hole, did not explicitly signal a September rate hike, but his remarks took a hawkish tone on inflation and the state of the economy. He framed the Fed’s 2% PCE inflation objective as a firm target and warned that getting to price stability is not automatic.

Warsh argued the Fed should keep its predominant focus on prices, citing a labor market that remains consistent with full employment. He pointed to unemployment at 4.1%, jobless claims near multi decade lows on a four week average, and employment conditions he described as supportive of full employment.

On whether current policy is already restrictive, Warsh questioned that premise. He cited rapid capital spending, strong corporate profits, tight credit spreads, healthy issuance, relatively easy bank lending standards, and concluded he would be hard pressed to describe broad financial conditions as restrictive.

For inflation, Warsh said recent summer CPI and PCE readings that beat expectations do not show that underlying trends have improved enough. He said more than half of PCE components rose faster than 3% over the past year and that six month breadth remains elevated, adding that the Fed must be confident underlying inflation is moving to its goal clearly and at sufficient speed or it will have more work to do. Action Forex also noted he rejected routine forward guidance because it can limit the Fed’s flexibility, and he said he stands committed to discipline rather than a decision.

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