Federal Reserve Chair Kevin Warsh delivered a highly anticipated speech on Friday, stating that inflation remains too high and should be the central bank's primary focus, while also offering his first comprehensive assessment of the U.S. economy. He remained committed to his pledge of avoiding forward guidance.
"We must be confident that core inflation is clearly and rapidly returning to target levels. If not, we will have to take action," Warsh said in his inaugural address as Chair at Jackson Hole, Wyoming. "Achieving price stability is the Fed's responsibility."
While Warsh did not provide forward guidance, he hinted that the restrictive impact of interest rates on the economy may be limited: "I find it difficult to describe the overall financial conditions as restrictive."
The highly anticipated speech comes at a time when markets are eager to know two key things: whether the Fed has a reliable strategy to reduce inflation, and how the Chair assesses the current state of the economy. Warsh addressed the latter; whether the market will accept his inflation strategy will be revealed through its reaction to the speech.
Regarding the Personal Consumption Expenditures (PCE) price index, Warsh described the data as "concerning." He referenced market-based inflation expectations indicators and emphasized the need for the Fed to heed these market signals.
"Market prices reflect confidence in our ability to achieve price stability, which is both an honor and a tradition for the Federal Reserve institution. I can assure you... that confidence is not misplaced," he stated.
Warsh noted that broad inflation measures have fallen significantly from their 2022 peak, but improvement over the past two years has been limited. Despite PCE and Consumer Price Index (CPI) data coming in better than expected this summer, "these data points do not represent a substantial improvement in the underlying inflation trend."
During the July press conference, Warsh questioned whether PCE would continue as the Fed's preferred inflation gauge, raising questions in the market. In Friday's speech, Warsh again referenced PCE, suggesting the metric will likely retain its status.
Corporate Profits Surge, Labor Market Holds Steady
Warsh painted a picture of a robust U.S. economy. He said growth appears to be strengthening, with business capital expenditure "rising rapidly," estimated at 9% over the past four quarters. Warsh believes that more than half of this year's capital spending growth likely comes from artificial intelligence-related infrastructure investment.
Despite surging oil prices, tariffs, and other multiple shocks, inflation-adjusted consumer spending has remained resilient, growing more than 2% over the past four quarters. He also referenced the earnings of S&P 500 companies, noting that corporate profit margins are "quite high relative to historical levels."
Warsh reiterated that the Fed closely monitors economic signals from the market. "We pay close attention to various indicators within the market, tracking the performance of different industry sectors," he said.
Warsh said he will continue to track corporate earnings, changes in capital expenditure growth rates, and the knock-on effects of these changes on asset prices, business confidence, household income, and consumption. He described the job market as "fairly stable," consistent with a state of full employment. He explained that the low labor turnover rate stems from the large-scale re-matching of employers and workers following the pandemic.
Warsh remains committed to not providing guidance on the future path of monetary policy. "Transparency in communicating future policy decisions is not inherently a virtue," he said.
However, he did explain the reasoning behind the Fed's decision to hold interest rates steady in July. Warsh stated: "I and the vast majority of my colleagues believed it was wiser to wait for more new information to emerge between the two policy meetings — particularly to assess potential developments in supply chains, investment flows, and geopolitics — before judging whether to adjust interest rate policy."
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