Trump's Fed Pick Prepares To Raise The Rates He Was Chosen To Lower

JACKSON HOLE, WYO.—Federal Reserve Chair Kevin Warsh used his first Jackson Hole address to prepare the country for the possibility of higher interest rates, giving President Trump’s campaign for cheaper borrowing the chairman it requested and the monetary policy it did not.

Warsh said inflation remains above the Fed’s fixed 2 percent target and has made only modest progress over the past two years. The preferred personal consumption expenditures measure rose 3.7 percent over the last 12 months and 4.1 percent over six months. He said better summer readings had not convinced him that underlying trends had “meaningfully improved.”

The breadth of the problem is harder to dismiss as one expensive category. Fifty-four percent of the 199 goods and services in the PCE basket rose more than 3 percent over the past year. Before the pandemic, about 32 percent did. Labor markets remain stable, business investment is brisk, and Warsh said broad financial conditions do not appear restrictive, leaving the central bank with fewer reasons to reward inflation with easier money.

Warsh did not promise a rate increase. He criticized routine forward guidance and said the Fed should commit to a discipline, not a future decision. Markets supplied the guidance anyway: the two-year Treasury yield rose after the speech, and traders increased the odds of a September hike. Trump, who selected Warsh while demanding lower rates, continued to defend him.

The administration has obtained a quieter Federal Reserve that may communicate through the price of credit. If inflation does not move toward target “at sufficient speed,” Warsh said, “we have work to do.” Borrowers now have enough guidance to understand who may be doing the work.