Fed's Warsh says inflation risks eased, core PCE at 3.4%

Federal Reserve Chairman Kevin Warsh said inflation risks have declined while reaffirming the central bank's commitment to price stability and independence.

Warsh said price risks have come down in recent weeks but reiterated the Fed's commitment to delivering price stability, pushing back against expectations the central bank would tolerate above-target inflation.

"Prices are too high, and I don't think I'm the only one on this stage that's recommitted to deliver price stability," Warsh said Wednesday at the European Central Bank's annual Forum on Central Banking in Sintra, Portugal.

The Fed's preferred inflation gauge, the core Personal Consumption Expenditures index, rose to 3.4% in May, the highest level since October 2023. Fed officials now see headline inflation at 3.6% and core at 3.3%, up from 2.7% previously. Warsh noted that inflation expectations over the first four months of his term have fallen.

The comments carry weight as markets assess the rate path for the rest of the year. Warsh deflected questions on the outlook, saying he wants a "good family fight" when policymakers meet in four weeks. His refusal to offer forward guidance marks a deliberate break from the communication strategy employed during the 2008 financial crisis.

Warsh's appearance at the Sintra forum comes two weeks after his inaugural press conference, where he surprised markets with a markedly hawkish tone. On Wednesday, he struck a more balanced posture — acknowledging that inflation risks have moderated while maintaining that the 2% target is non-negotiable.

"If there were people in the household or the business sector and the financial markets who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they'd be disappointed," Warsh said. "We're going to deliver price stability in the US."

The Supreme Court's ruling this week in favor of Fed Governor Lisa Cook provided a backdrop for Warsh's remarks on independence. The decision reaffirmed that the Fed does not need to worry about political or judicial intervention and can focus on its dual mandate, Warsh said. When asked whether the Fed would do what is needed to rein in inflation regardless of President Trump's desire for low rates, Warsh replied: "We've been an independent central bank for a very long time. We're going to be an independent central bank at this moment, and you're going to see no changes on that."

On the economic outlook, Warsh noted that structural productivity in the US has been in the high 2% range over the past four quarters, suggesting potential growth has trended up. He expressed cautious optimism about artificial intelligence's impact on supply, though he noted it is currently showing up on the demand side of the economy. Oil prices have plunged since President Trump announced a tentative deal with Iran, though the path of energy prices remains uncertain as negotiations face stops and starts and renewed strikes from both sides.

Warsh reiterated his preference for a smaller Fed balance sheet and said interest rate policy remains the fairest tool for conducting monetary policy across the broadest constellation of citizens. "Interest rate policy, whether we move it up or down, transmits its way into a new mortgage, (and) credit card debt transmits its way through a lending channel and credit channel," he said.

The next Fed meeting is scheduled in four weeks. Warsh declined to tip his hand on the rate decision, saying only that he expects a "good debate" behind closed doors. "I want us to have a good family fight," he said. "When we get into that room and shut the door, we're going to have a good debate, but I don't have much more for you than that."

This article is for informational purposes only and does not constitute investment advice.