Fed's Warsh faces challenge whether inflation is a problem or not

U.S. auto prices rose at a roughly 5% annualized pace ​in July, housing and utility costs increased at more than a 3.5% rate, and recreational goods prices ‌soared by ​a double-digit pace as households swallowed a 3.7% jump in the cost of living, nearly double what the Federal Reserve has promised. The U.S. central bank has now missed its inflation target for 65 straight months, from the moment prices began escalating to a 40-year-high in 2021 during the COVID-19 pandemic through a near-return to the target in 2024 and on to a new surge in prices after President Donald Trump took office for a second time. There's been little ‌progress in the past year and a half. In a much-anticipated speech on Friday to the Kansas City Fed's annual research symposium at Jackson Hole, Wyoming, new Fed Chairman Kevin Warsh is under pressure to address a central issue: Is current inflation a problem or not, and what should be done about it? Analysts and investors see the event as an early test of his willingness to adapt to a world growing more edgy about his plans. After an initial stint in which Warsh has repeated pledges about meeting the Fed's inflation target without saying how — while instead highlighting longer-term issues now under study by several Fed task forces — there's clamor for a shift ‌in focus. The talk has been so generic that "people are concerned about independence," and whether Warsh is reluctant to discuss possible rate hikes to avoid angering Trump, or upset efforts by Treasury Secretary Scott Bessent to somehow orchestrate lower borrowing costs, said Gregory Daco, chief economist at EY-Parthenon.

"You have to be that much ‌more careful in your communication that you're not signaling the potential of more coordination and collaboration, potentially, with Treasury; that you're not being influenced by the president to lower rates ... Those are all bad looks for any new Fed chair," Daco said. CREDIBILITY TEST Like all high-profile speeches by the head of the U.S. central bank, Warsh has to walk a fine line. Say too much and he may set expectations that are hard, or at least uncomfortable, to walk back; say too little and he risks losing credibility and ceding influence to others at the Fed who are offering more detailed arguments. Markets could tilt in either case. The Jackson Hole speech will be his first major address beyond the press conferences he held after the Fed's policy meetings in June and July. His comments in ⁠both cases steered ​away from the sort of detailed talk about the economy and possible rate outcomes that have ⁠become the norm at the Fed. While Warsh argued, and many others agree, that there are good reasons to say less than usual about monetary policy, given the level of uncertainty around the economic outlook, there's a sense as well that he has carried a self-imposed ban on "forward guidance" too far. Inflation has remained sticky, and the Personal Consumption Expenditures Price Index data for July ⁠may add to the sense that even if prices are likely to ease on their own, it will happen at too glacial a pace for the Fed to stay on the sidelines. After the data was released on Wednesday, investors nudged up bets the Fed might raise rates as soon as the September 15-16 meeting and would definitely do so by ​the end of 2026. At the July 28-29 session, three policymakers dissented against the decision to keep the policy rate steady in the current 3.50%-3.75% range in favor of a rate hike. The minutes of that meeting indicated broader sentiment for an increase, and several officials have made clear ⁠their patience is on a clock.

The Fed officials' concern is that their own credibility, considered a key central bank asset in fighting inflation, will be at risk if they don't back up promises of reaching the 2% target with rate increases — or at least the prospect of them if inflation data does not start to come into line reasonably soon. COMPLICATIONS FROM TREASURY Recent moves by Bessent to cap ⁠rising ​yields on long-term U.S. Treasury bonds, meanwhile, have made the landscape even more complicated for Warsh, whose stated desire to let bond investors set prices free of government "handholding" seemed undermined by the Treasury secretary's sudden lean into market activism. After a steady recent rise in what global investors are charging to lend the U.S. money to fund budget deficits running at nearly 6% of gross domestic product — a lofty level outside of periods when governments ramp up spending to fight a recession — Bessent in a surprise move last week said the Treasury would increase a previously announced debt buyback program. "Warsh made a big deal about wanting to hear what ⁠markets had to say. Well, the markets spoke and Bessent shut it down," Steven Blitz, chief U.S. economist for TS Lombard, wrote ahead of the Jackson Hole conference. "This is all about yields normalizing against a backdrop of too much federal debt, too little real growth for the effort, and the need for ⁠foreign capital," with federal spending helping keep inflation high but beyond the Fed's influence, Blitz wrote. Only ⁠one more employment report and a read on August inflation data will be released before the Fed's meeting next month.

For policymakers worried the central bank's inflation overshoot has gone on so long that it risks unmooring public trust, time is short. "Should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon to ensure we deliver price stability in a reasonable time frame," Boston Fed President Susan Collins said on Wednesday, with a further ‌hold on rates requiring "continued evidence that inflation is indeed ‌coming down." "Today's data doesn't meet that test," said Karim Basta, chief economist for III Capital Management, a fact that Fed policymakers may begin to gravitate towards with ​or without Warsh's support.