Federal Reserve Chair Kevin Warsh stated on Friday that US inflation has yet to show a meaningful and sustained slowdown, emphasizing that policymakers must be confident underlying inflation is returning to the 2% target at a sufficient pace, or further action will be required. He also stressed that the 2% inflation goal is firm and fixed, with price stability remaining the central bank's foremost priority.
This marks Warsh's first comprehensive policy address since assuming the role of Fed Chair in May. Speaking at the annual economic policy symposium in Jackson Hole, Wyoming, Warsh reaffirmed the Fed's determination to bring inflation back to its 2% objective. "We must be confident that underlying inflation is clearly and sufficiently rapidly moving toward our target," Warsh said in prepared remarks. "If not, we still have work to do. That is our job."
Current Financial Conditions Not Restrictive
Warsh also noted that current financial conditions are not restrictive, while reiterating that interest rates remain the "primary tool" for achieving the Fed's policy mandate. Despite better-than-expected readings from the Personal Consumption Expenditures (PCE) price index and Consumer Price Index (CPI) released this summer, Warsh indicated these figures are insufficient to demonstrate a substantial improvement in underlying inflation trends. "While this summer's PCE and CPI data came in better than expected, they have not convinced me that the underlying trend has shown meaningful improvement," Warsh stated. "Market pricing suggests investors believe we can achieve price stability. I can assure you, their judgment is correct." He further noted that with inflation still above 2%, the Fed's primary focus should remain on prices. He also emphasized that price stability is not automatic and inflation does not necessarily revert to its long-term average on its own. "Price stability is not automatic, and inflation does not necessarily mean-revert on its own. Achieving stable prices is the Fed's job."
First Clear Signal of a Tougher Stance on Inflation
Warsh's speech drew significant market attention. Previously, his strategy of reducing the Fed's external communications had drawn criticism from some economists and investors, who felt the central bank lacked clarity on near-term economic prospects and monetary policy direction. This Jackson Hole address directly addressed those concerns. Compared with earlier remarks, Warsh articulated his views on the US economy, inflation, and the Fed's policy priorities much more definitively, while reasserting the central bank's commitment to its 2% inflation target. There had been market speculation that the Fed under Warsh might adjust the 2% inflation goal. At a press conference following the July policy meeting, Warsh hinted that the Federal Open Market Committee's (FOMC) inflation target could potentially be revised, while avoiding questions about possible rate hikes in the coming months. That performance drew widespread criticism and triggered a selloff in long-dated Treasuries, pushing yields to near 20-year highs, which some investors interpreted as eroding confidence in the Fed's commitment to its 2% target. Warsh's explicit emphasis on the 2% target as "firm and immovable" directly addressed those market doubts.
Clear Divisions Within the Fed on Rate Hikes
Economists remain sharply divided over whether the Fed will need to resume rate hikes in the coming months. At its July monetary policy meeting, the Fed voted to hold rates steady, but meeting minutes revealed that several officials supported a hike, while many others believed further tightening would be necessary if inflation failed to continue declining. This marks the fifth consecutive hold following three rate cuts in late 2025. However, economic data released since the July meeting has generally pointed to cooling US economic activity, somewhat reducing the immediate pressure for a rate hike. July retail sales posted their largest drop in over a year, core inflation remained relatively subdued, and US employers unexpectedly cut jobs in July, with prior months' payroll gains also revised downward. These indicators suggest that economic growth and the labor market are losing some momentum.
Market Sharply Reduces September Hike Expectations
As economic data weakens, investors have significantly scaled back bets on further Fed tightening. As of Friday, federal funds futures pricing indicated roughly a 36% probability of a rate hike in September, a sharp decline from levels above 70% in late July. This leaves the Fed facing a more complex policy trade-off. On one hand, inflation remains above the 2% target, with Warsh clearly stating that declaring victory over inflation would be premature. On the other hand, consumption, employment, and overall economic activity are showing signs of cooling, and continued tightening could amplify downside risks to growth. The core message from Warsh's Jackson Hole speech is that despite recent improvements in inflation data, the Fed is not yet prepared to declare its anti-inflation mission complete. Until underlying inflation shows clear and rapid progress toward 2%, the Fed will retain the option of further policy tightening, and the 2% target will not be easily altered by short-term economic pressures.
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