Federal Reserve (Fed) Chair Kevin Warsh left the door open to raising interest rates in his first Jackson Hole speech on the 28th after taking office. That runs directly counter to the Trump administration, which had hoped for rate cuts. The Financial Times (FT) said President Donald Trump and the Fed have entered a "collision course."
Warsh delivered the keynote address at the Kansas City Federal Reserve Bank's Economic Policy Symposium in Jackson Hole, Wyo., on the 28th—known as the Jackson Hole meeting—saying, "Here is the Fed's bar for (rate cuts). We need confidence that underlying inflation is moving toward target clearly and at a sufficient pace," adding, "If not, we have work to do." The Jackson Hole meeting is an international currency policy conference held every August by the Kansas City Fed, which brings together Central Bank governors and economists from major countries.
Warsh took the Jackson Hole stage for the first time since becoming Fed chair in May. In his keynote, he defined the short-term interest rate as the "predominant tool" to achieve the Fed's dual mandate. Warsh also firmly dismissed market speculation that the Fed is looking to tweak its inflation target. He reiterated that the 2% target on the personal consumption expenditures (PCE) price index is a "firm, fixed target." On the current level of rates, he said, "It is hard to characterize overall financial conditions as tight."
In fact, all the inflation gauges Warsh cited are running above target. The Fed's preferred PCE price index rose 3.7% in July from a year earlier. The consumer price index (CPI), which is more commonly used than the PCE index, rose 3.4%. Warsh said, "The figures are more concerning," adding, "These numbers tell the same story that inflation is running above the Fed's 2% target."
Experts said the speech was unusual, noting that Warsh has rarely expressed public concern about U.S. inflation. Since taking office in May, Warsh has offered few public remarks, arguing that "forward guidance" on the future rate path distorts the stock and Government Bonds markets. At the Federal Open Market Committee (FOMC) meeting on the 29th of last month, the Fed also left the benchmark rate unchanged at 3.50%–3.75% a year, without laying out clear decision criteria. The Wall Street Journal (WSJ) said the speech "most forcefully signaled the Fed's resolve to tame inflation," adding the Fed offered "the clearest explanation of how it will achieve its inflation goal."
Earlier, President Trump criticized the Fed's decision to hold the benchmark rate at 3.50%–3.75% a year at the July FOMC as "ridiculous." In January, Trump nominated Warsh after a vetting process to find someone who shared his views. Eswar Prasad, a Cornell University professor, told the FT, "Warsh drew a clear line on the goals he is pursuing and his intent," adding, "That will put Trump—who demands rate cuts regardless of indicators or outcomes—on a direct collision with the Fed."
The White House, just before this Jackson Hole meeting, resumed an attempt to fire Fed Governor Lisa Cook on mortgage loan fraud allegations, again turning up pressure on the Fed. In August last year, during former Chair Jerome Powell's tenure, the Trump administration sought to dismiss Cook, who was nominated by the Biden administration, citing alleged mortgage fraud. That attempt collapsed at the Supreme Court on procedural grounds. Separately, Treasury Secretary Scott Bessent, after a sharp jump this month in long-dated U.S. Government Bonds yields, unexpectedly rolled out measures to increase Government Bonds buybacks (repurchases).
The New York Times (NYT) reported that Warsh faces a situation in which raising rates would clash with the Trump administration, while holding steady could cost him market credibility by casting doubt on his resolve to fight inflation. Investors, right after Warsh's Jackson Hole remarks, bet that the Fed will raise rates in September. In federal funds futures, where traders wager on rate direction, the probability of a September hike jumped more than 20 percentage points to 57.5% from around 35% before the speech. The probability of holding steady fell to 42.5%. The Fed will set the benchmark rate at the next FOMC on Sept. 15–16. Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, told the NYT, "Warsh has several targets on his back," calling it a "no-win situation" against the administration and markets.
At last month's FOMC, three of the 12 Fed Commissioners with a vote cast ballots not just against a rate cut but for a 0.25-point increase. Aditya Bhave, head of U.S. economics at Bank of America, said, "Barring very weak August jobs and inflation data, the responsibility for a September hike rests with Warsh," adding, "If he doesn't, he will lose market credibility." The August CPI will be released on the 11th, four days before the FOMC.
Among European Central Bank officials attending the Jackson Hole meeting, most said the United States needs to squeeze inflation further. Primož Dolenc, a European Central Bank (ECB) Governing Council member and Slovenia Central Bank governor, told Bloomberg, "Given the new data, it's unlikely inflation will improve on its own," flagging the need for a September rate hike. By contrast, Bank of England Governor Andrew Bailey told Bloomberg, "Second-round effects are quite contained, and the labor market has been weakening for some time," adding, "For the time being, I think the Fed can watch the situation."
David Wessel, a senior fellow at the Brookings Institution, told the FT, "I think Chair Warsh aimed to send a hawkish (currency tightening-preferential) signal," adding, "But to declare independence from Trump, he needs to actually raise rates, not just talk tough."