Warsh tells Jackson Hole the Fed has work to do if inflation stays high

Federal Reserve Chair Kevin Warsh used his first Jackson Hole keynote on Friday to draw a line under the inflation target and to warn that policy may have to tighten if prices do not fall fast enough. He did not announce a hike. He described the test he will apply.

"Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," he told the symposium in Grand Teton National Park. "That's our job, our mandate, and our charge to keep."

He said inflation is running above the 2 percent target measured by the personal consumption expenditures price index and that this target is firm and fixed. In July he had mused about other measures. On Friday he closed that door.

The data he put on the table

Warsh said recent prints have been better than feared but "do not tell me that underlying trends have meaningfully improved." Inflation has been above target for 65 months. He put that record on the Fed itself. "The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank."

He described the labour market as close to full employment. Unemployment was 4.1 percent in July. The economy, he said, looks resilient. The policy rate has sat in the 3.50 to 3.75 percent range since December. In that setting, "credit and loan markets are showing few signs of policy restraint." If borrowing still looks easy while prices stay high, the next move is more likely up than down.

He added that inflation expectations still look anchored and must be watched closely. "It's the Fed's job to make sure that inflation expectations do not get unanchored."

A quieter Fed, and a fight with the White House

Warsh used the same speech to push his campaign against detailed forward guidance. He told the room not to call his remarks a rate path. "You can call it an outline. You can call it a trail map, just don't call it forward guidance." He wants fewer dot plots and fewer public forecasts of the next meeting. Task forces on communications, data, inflation and the balance sheet are supposed to design the replacement.

A September increase would put him across President Donald Trump, who has pressed for cuts. Warsh said a good majority of colleagues judged in July that they wanted more weeks of data before changing rates, and that they stood ready to act if the numbers required it.

Futures moved after the speech. Markets priced about a 60 percent chance of a September hike, up from about 40 percent. Heather Long at Navy Federal Credit Union read the text as opening the door to a hike this year, more likely in October or December than in September. Omair Sharif of Inflation Insights said the chair finally gave markets a clearer read on how he sees the current inflation data.

What to watch before the next meeting

The next PCE release and the next employment report will decide whether "work to do" becomes a vote. Warsh has now said the target will not be redefined and that easy credit at the current rate is a fact he is willing to cite. That combination is the closest he has come to putting a hike on the table since he took the chair.