Federal Reserve Chairman Kevin Warsh said the Fed’s dual mandate of price stability and full employment is not contradictory, adding that reducing inflation will encourage employers to create new jobs.
Commenting on the U.S. economy during the session, Warsh said economic activity remains strong and financial markets are generally functioning in a healthy manner. But he noted that conditions in the housing market are mixed, adding that inflation rates that have been above the Fed’s target for an extended period of time are putting pressure on housing finance and affordability.
Warsh said the Fed can reduce the impact of this problem by ensuring price stability, adding that the labor market has also shown “remarkable resilience.”
“The two elements of the Fed’s dual mandate are not contradictory. The more successful we are in controlling inflation, the more employers will be willing to hire workers,” Warsh said.
Warsh emphasized that there is still work to do on inflation and reiterated the Fed’s commitment to its 2% inflation target and price stability. He said the central bank had the necessary policy tools to bring inflation back on target.
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No forward guidance on interest rates
It’s worth noting that Warsh’s comments contained limited direct signals on interest rate policy. The Fed Chair maintained his approach of not providing forward guidance on the future direction of interest rates.
Warsh said the more the Fed focuses on its responsibilities, the more it can distance itself from political debate.
“The more we focus on our responsibilities, the more we can distance ourselves from politics,” Warsh said, adding that the Fed would continue to make monetary policy decisions independently.
Asked what he would do if President Donald Trump tried to interfere with Fed policy, Warsh said he would continue to serve and insist on independent monetary policy decisions.
Warsh said the Fed will review its current inflation framework to better understand the root causes of inflation and evaluate possible policies to combat price pressures.
Warsh said the task force established for this purpose is still in the study and evaluation phase, and will initially be discussed among the Fed’s 19 policymakers.
Warsh said the process will be conducted in an open and transparent manner, and findings and policy recommendations will be shared with the public on a regular basis.
Governor Warsh also commented on the Fed’s balance sheet policy, saying that the Fed’s balance sheet is not only part of money market operations, but also a direct part of monetary policy.
Mr. Warsh said his views on the Fed’s large balance sheet are well known, but he does not intend to prejudge decisions made by the newly formed balance sheet task force.
Warsh emphasized that changes in balance sheet policy will be communicated to the market in advance.
“We will ensure that any changes to balance sheet policy are notified in advance, decisions are announced, and publicly discussed. Both the Federal Open Market Committee and financial markets will be given the necessary preparation time.”
Warsh also said the Fed may seriously consider when to start buying Treasuries. However, he stressed that the central bank should avoid intervening in fiscal policy.
“We don’t want to save anyone, including virtual currencies.”
Warsh said the Fed should not be involved in rescue operations, adding that this approach also applies to the crypto sector.
“We want to be in a position where we don’t have to bail out anyone, including those in the crypto sector,” Warsh said, sending the message that the consequences of risks in the financial system should be borne by investors and market participants.
Warsh also said he is not concerned about economic growth supported by artificial intelligence and technological advances.
“We are not afraid of growth through productivity gains,” Warsh said, noting that large productivity gains can support economic growth and employment without causing inflation.
Market expectations for interest rate hikes recede
Welch, an investment expert at SignatureFD, said the market is pricing in a higher chance of the Fed raising rates.
The weak consumer price index in June reduced the likelihood of short-term rate hikes in futures markets, but CME Group data showed that the possibility of at least one rate hike before the end of the year has not been completely ruled out.
Welch noted that despite fluctuations in fuel prices, inflation is generally trending downward.
“We still haven’t seen enough wage growth to support sustained, broad-based inflation across the economy,” Welch said, adding that Warsh’s remarks were intended to move long-term inflation expectations closer to the Fed’s 2% target.
*This is not investment advice.
