Federal Reserve Chair Kevin Warsh used his first Jackson Hole speech on Aug. 28 to reaffirm the central bank's commitment to pulling inflation back to its 2% target, calling the goal "clear and fixed" and insisting that price stability will not happen on its own.
Warsh said the Fed must be convinced that underlying inflation is moving toward target at a pace that is "clear and fast enough"; otherwise, "we have more work to do." He pointed to the summer's better-than-expected PCE and CPI readings but said they have not convinced him that the underlying trend has meaningfully improved. With inflation still above 2%, he said the Fed's "primary focus right now should be on prices."
The chair also pushed back on the idea that financial conditions are restrictive, describing them as not restrictive and calling interest rates the Fed's "primary tool." He argued that forward guidance should play a limited role, and that policymakers should not base forward-looking policy on stale or inaccurate data. At the same time, he said the odds of materially stronger economic growth are rising.
On market expectations, Warsh said market pricing reflects confidence that the Fed will deliver price stability, adding, "I can assure you, the market assessment is right." He closed by stressing that price stability is the Fed's responsibility and will not be achieved automatically.
Federal Reserve Chair Kevin Warsh delivered his first Jackson Hole speech on Aug. 28 with a clear message: bringing inflation back to 2% is a "clear and fixed" goal, and the central bank still has work to do.
"My standard is that we must be convinced that underlying inflation is moving toward our target, and at a pace that is clear and fast enough. Otherwise, we have more work to do. That is our job," Warsh said.
He repeated that the Fed will bring inflation back to its 2% target, calling it an explicit and fixed objective. But he said inflation data do not show a significant improvement in the trend. "Even though PCE and CPI data released this summer were better than expected, they have not convinced me that the underlying trend in inflation has meaningfully improved," he said. With inflation still above 2%, Warsh said the Fed's "primary focus right now should be on prices."
The chair also addressed financial conditions, saying it is difficult to describe them as restrictive. "Financial conditions are not restrictive," he said, adding that interest rates are the Fed's "primary tool" for carrying out its duties. He argued that forward guidance should have a limited role and that the Fed should not base forward-looking policy on outdated or inaccurate data.
Warsh struck a more optimistic note on the economy, saying the probability of materially stronger growth is rising. He also urged market participants to focus on real information in the economy. On market pricing, he said: "Market prices reflect the market's belief that we will achieve price stability. I can assure you, the market's assessment is right."
He closed by emphasizing the Fed's responsibility. "Let's be equally clear about another aspect of the goal: price stability will not happen automatically, and inflation will not necessarily return on its own. Achieving price stability is the Fed's responsibility."
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