Fed chair impressed by US economy, still hopes to tame inflation

With inflation still running hot, Federal Reserve Chair Kevin Warsh said policymakers’ focus right now should be on bringing down prices during a keynote address at an annual symposium in Jackson Hole, Wyoming. 

Since taking over as Fed chair in May, Warsh has remained quiet on what’s next for short-term rates. He said the federal funds rate, the Fed’s benchmark for interest rates across the country, is the predominant tool to achieve price stability and maximum employment. But those hoping for clarity on the Fed’s next rate decision didn’t get it. Instead, Warsh made a case against giving markets forward guidance.

“If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we’re more likely to be blinded to new developments,” Warsh said. “If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it? Not the financial high-fliers. Hardworking Americans are the ones left to deal with inflation that is too high or jobs that suddenly appear less secure.”

Warsh said he was impressed by the overall performance of the U.S. economy, adding it “appears to have strengthened.” He said the labor market is “quite stable,” consumer spending is “healthy,” and pointed to rising business capital expenditures driven by investment in artificial intelligence.

“There are always areas of concern in the labor market. For example, among recent graduates,” Warsh said. “In general, though, people who want to work, by and large, are holding or finding jobs. They may well be concerned about future labor disruptions, but as of now, I believe the labor markets are broadly consistent with full employment.”

More: Jackson Hole is one of the 10 most expensive towns in the nation

After Warsh’s remarks, the market appeared to be “reacting exactly the way the Fed wants,” with short-term rates higher and long-term rates marginally lower, according to Larry Holzenthaler, a senior portfolio manager at Catalyst Funds. 

“Investors should clearly expect that the Fed is going to raise rates if it needs to,” he said in a note to USA TODAY. 

‘A hinge point in history’

After Goldman Sachs Research estimated this month that U.S. investment in AI will total just under $600 billion in 2026, Warsh said the economy has reached “a hinge point in history.”

“The potential for substantially higher growth is on the rise,” he said. “Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts.” 

Warsh said the Fed is watching these developments closely, and while they bring about a lot of questions, he doesn’t have all the answers. 

“Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?” Warsh asked. “Will token usage be complimentary or competitive to labor?” 

He continued, asking who will benefit most from the AI buildout. 

“AI labs, chipmakers, energy producers, and cloud providers?” he added. “Over time, how much of that value accrues to businesses and consumers?”

Warsh said these are questions for one of the five task forces he created at the Fed, which is focused on productivity and jobs. Democratic lawmakers criticized Warsh’s selection of members to join that task force during his Senate testimony in July. When Sen. Tina Smith, D-Minnesota, said he chose people “who are likely to get richer” because of the technology, Warsh said the task force would “hear from folks that will be affected.” 

“My early check-ins with the leaders of that task force, and the four others, have been encouraging,” Warsh said Aug. 28. “To be clear, though, their recommendations will come later and have no bearing on decisions we make in the current policy conjuncture.”

Why the Fed chair’s keynote address may matter to consumers

Warsh chairs the Federal Open Market Committee, the body responsible for setting a target range for short-term interest rates.

It typically raises the range to tame inflation and lowers it to stimulate the job market. A higher range means U.S. consumers pay more interest on things like credit cards, car loans, and personal loans, while savers benefit from higher returns on their high-yield savings accounts and certificates of deposit. A lower range has the opposite effect.

The committee voted in July to keep the range at 3.5% to 3.75%, as it has so far this year. Since then, policymakers have witnessed the United States reignite a trade war with Canada. There’s also the ongoing war in Iran. Both developments risk driving prices higher.

As of Aug. 28, a majority of traders are still predicting that the committee will leave the target range unchanged at its next meeting in September, according to CME FedWatch, though many are still betting on a hike sometime before the end of 2026.

The Fed chair had an opportunity to “set the agenda” at the symposium, Skanda Amarnath, Employ America executive director and former New York Fed research analyst, said ahead of the event.

How is the US economy doing?

Inflation continues to run well above the Fed’s 2% target. Personal Consumption Expenditures, the Fed’s preferred measure of inflation, was up 3.7% over the year in July, in line with June’s pace. 

The Labor Department’s Consumer Price Index showed that prices overall rose 0.1% over the month in July, but the rate of annual inflation slowed to 3.4%. Over the year, prices still rose faster than workers’ paychecks. 

After a hiring spree this year, the labor market has shown some signs of cooling. U.S. employers shed 23,000 jobs in July, but the national unemployment rate dropped to 4.1%, though experts said it fell for “the wrong reason.”

U.S. real gross domestic product, or GDP, increased at an annual rate of 1.5% in the second quarter this year, according to the latest estimate from the Bureau of Economic Analysis. That’s a “solid, but unspectacular” performance, according to Jim Baird, chief investment officer with Plante Moran Financial Advisors.

Consumers are still spending, but they’re feeling a little worse about the economy. The Conference Board’s consumer confidence index and the University of Michigan’s measure of consumer sentiment both fell in August. 

“Although the early month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree,” Joanne Hsu, the university’s director of surveys of consumers, said in a statement.”These groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation.”

What are Fed governors saying?

Although the Federal Open Market Committee voted to hold its benchmark for interest rates steady at its last meeting, the decision wasn’t unanimous. Three of 12 voting members dissented. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan preferred to raise the target range by a quarter-point.

“Now is the time to act,” Hammack said in an Aug. 11 post to LinkedIn. “There’s no tension in the mandate. Policy isn’t restrictive. And the longer we wait to take action to bring inflation back to our 2 percent objective, the more challenging it will be to bring it back down and the more expensive it will be for the American people.” 

Minutes from the July meeting revealed “most” participants thought inflation would cool throughout the remainder of the year as the effects of tariffs and energy prices waned, but that “many” were concerned inflation would stay elevated as the Iran war limits oil supply and AI investment pushes up demand. Committee members thought labor market conditions were “stable,” and judged that higher rates “would likely be necessary if inflation did not decline,” the minutes said. 

Kashkari told CBS on Aug. 23 that he’s watching to see how continued conflict in the Middle East and a U.S.-Canada trade war will affect prices, but that he’s waiting to see August inflation and employment data before deciding how he will next vote. 

“I don’t want to prejudge the next meeting, but I’m not feeling confident right now that inflation is heading back down to target in a short period of time,” Kashkari said. “The longer there’s back and forth on the trade front, just like the longer there’s back and forth in the conflict of Iran, the imprint in inflation ends up being extended and delayed.”

Although Fed Governor Lisa Cook did not dissent from the last decision, ahead of the July meeting she said she’d be prepared to act if inflation didn’t begin to slow. She is still fending off an attempt by President Donald Trump’s administration to remove her from her role. Her lawyers, in an Aug. 26 statement to USA TODAY, maintained that there is “no legal basis” for her removal.

(This story was updated to add new information.)

Reach Rachel Barber at rbarber@usatoday.com, follow her on X @rachelbarber_, and subscribe to her newsletter “Making More of Your Money” here.

This article originally appeared on USA TODAY: Fed chair impressed by US economy, still hopes to tame inflation