Federal Reserve Chairman Kevin Warsh warns inflation is not slowing

Federal Reserve Chair Kevin Warsh said the US economy is showing considerable strength but warned that persistent inflation means monetary policy still has work to do.

Speaking at Jackson Hole on Friday, Warsh said the Fed’s predominant focus should be on prices, noting that PCE inflation remains well above the central bank’s 2% target and that recent progress has been modest.

While Warsh said current financial conditions are not restrictive and reiterated that interest rates are the Fed’s main policy tool, he did not commit to a September rate increase.

“I stand here today committed to a discipline, not to a decision,” he said. Markets nonetheless increased the probability of a September hike to more than 45%, with two-year Treasury yields rising.

Warsh’s comments marked his clearest explanation yet of the Fed’s policy priorities after investors and economists criticized his limited guidance following the July meeting. He said recent PCE and CPI readings were better than expected, but it did not convince him that underlying inflation trends had materially improved.

On how the Fed communicates policy, Warsh said forward guidance has outlived its usefulness in normal times. He argued that excessive guidance can create a “hall-of-mirrors” dynamic in which markets rely on the Fed’s signals while the Fed relies on market prices, potentially leaving both sides less prepared for economic shifts. He said the Fed should communicate more purposefully while preserving flexibility to respond to incoming data.

Warsh also emphasized the potentially transformative impact of artificial intelligence on economic growth and productivity. He said AI investment is already driving a large share of capital-expenditure growth and described the technology as a potential new factor of production.

The Fed is examining how AI could affect productivity, labor demand, capital intensity, market structure and the distribution of returns between AI companies, chipmakers, energy producers, cloud providers, businesses and consumers, according to the Fed chief.

This is a developing story.