Federal Reserve Chair Kevin Warsh said on Wednesday the US central bank would not tolerate inflation above its 2% goal, using a policy forum in Portugal to push back against pressure for rate cuts. Traders kept pricing a more than 70% chance of no move at the July Fed meeting, while September remained closer to a coin toss for a hike.
Event Details
Warsh told the European Central Bank forum in Sintra that inflation remained too high even as near-term risks had eased. He said any households, businesses or investors expecting the Fed to accept inflation above target ‘would be disappointed’.
The remarks marked his first major overseas appearance as Fed chair after a hawkish inaugural press conference in June. He shared the stage with ECB President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem.
Warsh also repeated that the Fed would preserve its independence, despite President Donald Trump’s calls for sharply lower borrowing costs.
Inflation Backdrop
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 4.1% in May from a year earlier. Core PCE, which strips out food and energy, rose 3.4%, according to the Bureau of Economic Analysis.
Energy prices drove much of the recent jump after the war in Iran disrupted fuel markets, but oil has since fallen following a ceasefire. That has helped ease inflation expectations, giving Warsh room to acknowledge lower risks without signalling easier policy.
Bob Doll, chief executive of Crossmark Global Investments, told MarketWatch that ‘this inflation problem is much more entrenched than the Fed is willing to acknowledge’.
Policy Context
Warsh has moved away from the more expansive forward guidance associated with recent Fed chairs. He said policy decisions should be debated inside the Federal Open Market Committee rather than telegraphed too far in advance.
That approach could make markets more volatile around data releases. It also raises the stakes for the June jobs report, wage data and the next inflation readings.
The Fed’s June projections showed officials divided over whether rates should rise again this year. Warsh did not submit his own projection, consistent with his criticism of the dot plot as a communications tool.
Outlook
The next phase will depend on whether falling oil prices feed through to broader inflation and whether the labour market remains firm enough to justify tighter policy.
Traders will watch the June employment report, the next PCE release on July 30 and any shift in Fed communication before the September 15-16 meeting.
