Fed Chair Warns Inflation Progress Remains Too Weak, Keeps Rate Hikes on Table

US Federal Reserve Chair Kevin Warsh has warned that policymakers may need to raise interest rates if they are not convinced that underlying inflation is falling towards the central bank's 2 percent target.

Speaking on Friday at the Federal Reserve's annual economic symposium in Jackson Hole, Wyoming, Warsh delivered one of his clearest signals yet that further monetary tightening could be necessary to contain persistent price pressures.

Warsh said financial conditions in the US did not appear sufficiently restrictive and emphasised that the Fed must be confident that inflation is moving towards its target at a meaningful pace.

"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said.

Although he stopped short of indicating when rates could be increased, Warsh cautioned that his comments should not be interpreted as formal guidance about the Fed's next policy decision.

Nevertheless, markets are increasingly pricing in the possibility of a rate increase at the central bank's September meeting. Data tracked by CME Group's FedWatch tool showed a 57.4 percent probability of a 25-basis-point increase at the meeting scheduled for mid-September.

Warsh stressed that interest rates remain the Fed's primary instrument for fulfilling its dual mandate of maintaining price stability and supporting maximum employment.

"Short-term interest rates are the predominant tool to achieve the dual mandate," he said, adding that the central bank must ensure inflation expectations remain firmly anchored.

His comments came as the latest inflation data continued to show stubborn price pressures.

The Personal Consumption Expenditures Price Index, the Fed's preferred measure of inflation, stood at 3.7 percent annually in July. Warsh said the pace of improvement over the previous two years had been limited and argued that the latest figures did not show a significant improvement in underlying inflation trends.

He also pointed out that inflation measured by the PCE index remained around 3 percent, significantly above the levels recorded before the COVID-19 pandemic.

Analysts at Capital Economics described Warsh's speech as considerably more hawkish than his most recent press conference remarks.

The firm said his comments left open the possibility of a rate increase sooner than its current forecast of December, particularly if upcoming inflation figures show further signs of persistent price growth.

Warsh's remarks are likely to increase scrutiny of the Fed's next economic data releases, particularly those covering inflation and employment, as policymakers weigh whether current interest rates are sufficiently restrictive.

Beyond the immediate outlook for monetary policy, Warsh used his Jackson Hole address to discuss longer-term economic issues, including the potential impact of artificial intelligence on the US economy.

He said recommendations from five task forces established by the Federal Reserve would be released at a later stage and would focus on emerging challenges facing monetary policy in the years ahead.