Federal Reserve Chair Kevin Warsh stated on Friday that the central bank remains committed to returning inflation to its 2% annual target, noting that the Fed "will have work to do" if policymakers are not confident the rate is returning to that level. Speaking at the Jackson Hole economic symposium, Warsh came closer than previously to acknowledging that interest rate hikes may be needed to ease price pressures. The remarks follow recent data showing the Personal Consumption Expenditures Price Index rose 3.7% in the 12 months through July.
The address followed market uncertainty regarding Warsh's leadership and the Fed's "reaction function," or how it responds to economic shifts. Since taking office several months ago, Warsh has moved to reduce forward guidance—the practice of signaling future interest rate paths—and has established task forces to review the Fed’s balance sheet and inflation framework. Some investors previously questioned his inflation-fighting credibility after he suggested in July that rising market yields might reduce the need for formal rate hikes.
Market response to the speech saw the two-year U.S. Treasury yield rise to 4.34%, its highest point in a month. Investors also adjusted their expectations for the upcoming September meeting of the Federal Open Market Committee (FOMC). According to LSEG data, the probability of a rate hike in September rose to 57% following the speech, up from 35% earlier in the day. The S&P 500 stock index fell 0.3%.
Investor focus now turns to impending U.S. economic data releases, including the monthly jobs report scheduled for next Friday and the Consumer Price Index data due the following week. Warsh has not confirmed a rate hike, and some strategists noted that while he clarified his stance on the inflation target, there remains relatively little guidance on what specific data combinations would cause the Fed to act.