The Fed Chairman believes that inflation is too high

On July 1, at the ECB Central Bank Forum in Portugal, US Federal Reserve (Fed) Chairman Kevin Warsh refused to give any signal about the interest rate decision at this month’s meeting. However, he emphasized concerns about inflation.

“Over the past few days, we’ve all been talking openly about AI and productivity. Besides, when we look around, we also see that prices are too high,” Warsh said in a discussion session.

He felt relieved that inflation forecasts had recently cooled, but emphasized that the current data is still not reassuring. “If households, businesses or investors think that the Fed accepts inflation higher than 2%, they will be disappointed. We will make prices in the US stable again,” he said.

The US Personal Expenditure Index (PCE) in May increased by 4.1% over the same period last year – the highest in the past 3 years. This is the Fed’s preferred measure of inflation. Over the past 5 years, US inflation has not yet returned to the 2% target.

After Warsh’s statements, investors slightly reduced their forecasts for the probability of the Fed raising interest rates. However, they still bet the likelihood of the Fed taking action at the September meeting is 70%. “It seems that investors’ initial assumption that the Fed under Warsh’s leadership would soon cut interest rates did not come true,” said Oren Klachkin – economist at Nationwide.

When asked if this would disappoint US President Donald Trump, Warsh replied: “We are an independent agency and this will not change.” Mr. Trump nominated Warsh for the position of Fed Chairman and previously stated many times that he wanted to reduce interest rates.

Aside from a press conference after a policy meeting two weeks ago, this was the first time Warsh spoke publicly since being confirmed by the Senate in May. The Fed has kept interest rates unchanged since early this year, weighing persistent inflation against other factors in the economy.

Warsh also said that next week he will announce the personnel for the five working groups he mentioned last month, to evaluate the Fed’s activities. Previously, he announced that the Fed would research and make changes to improve monetary policy management.

He expects that in the next 9-12 months, this agency will apply new technologies to better understand the economic situation in real time. “This will help us make better decisions,” he said.