Warsh Reaffirms ‘Will Deliver Price Stability;’ Cagey On Fed’s Next Move

– Won’t Prejudge Outcome Of Late October FOMC Meeting

– ‘Discouraging’ Inflation Reports Change Some Attitudes Toward Tightening

By Steven K. Beckner

(MaceNews) – Federal Reserve Chairman Kevin Warsh reaffirmed the Fed’s commitment to “deliver price stability” late Thursday in Bangkok, but refused to give any guidance as to what further actions he and his fellow monetary policymakers will take to fulfill that pledge, or when.

With less than two weeks before the Fed’s rate-setting Federal Open Market Committee meets to reassess the economic outlook and its monetary stance, and with the mid-term elections looming closely thereafter, Warsh played it safe.

He noted that the FOMC “removed a dose of accommodation” at its mid-September meeting, but said he will not “prejudge” the outcome of the late October or December meetings.

Warsh, joining International Monetary Fund Managing Director Kristalina Georgieva in a “fireside chat” at the annual IMF-World Bank meetings in Thailand, said he views his job as “get(ting) policy right” at a challenging time and to protect the Fed’s “institutional credibility” – an apparent oblique reference to the U.S. central bank’s obligation to get inflation down to its 2% target.

He suggested the Fed can afford to focus predominantly on inflation by pointing out the strength and resilience of the U.S. economy, including what he called a “massive investment surge” that is fueling demand for goods and services. Eventually, he said, AI investment will boost productivity and the “supply side” of the economy, but for now it is primarily increasing demand, thereby exerting upward pressure on costs and prices.

Warsh’s comments followed Labor Department reports showing a resurgence of consumer and producer prices in September, which Chicago Federal Reserve Bank President Austan Goolsbee called “discouraging,” a continuation of which would be “totally unacceptable.” .

Prior to the disheartening inflation reports of the last two mornings, Fed policymakers had seemed to signal that a late October rate hike was unnecessary or premature, but those price data were widely seen as reopening the door to a possible early tightening move.

A number of Fed officials had been pointing toward additional rate hikes, but not necessarily as soon as the FOMC’s late October meeting. Indeed, key policymakers were seemingly seeking to discourage speculation about a rate increase at that time. But that was before those disappointing inflation data were announced Wednesday morning and Thursday morning.

New York Federal Reserve Bank President John Williams said Tuesday he expects the FOMC to make one more 25 basis point rate hike this year, as he and his colleagues projected at their September meeting, but not more than that.

Contrary to some reporting, the FOMC Vice Chairman did not say he sees no need for additional increases in 2027. He left next year’s rate path wide open, saying “we’ll see” about next year.

Before the CPI release Wednesday morning, Fed Vice Chairman for Supervision Michelle Bowman said she doesn’t “feel any urgency” to raise rates.

Fed Gov. Christopher Waller, who last week said he “anticipate(s) additional hikes to support a timelier return of inflation to our 2% goal,” but said “there is some flexibility about when those hikes will occur,” was even more vague about what kind of action he’ll advocate at the upcoming FOMC meeting on Tuesday.

For one thing, he said, higher bond yields are “doing a little bit of the work.”

Although the predominant view before the pair of inflation reports seemed to be that there was “no urgency” to raise rates, some seemed to be in more of a hurry, or at least less inclined to “look through” or be “patient” after 5 ½ years of overshooting the 2% inflation target that jeopardize the Fed’s credibility.

For instance, Cleveland Fed President Beth Hammack said Monday that the Fed needs to get monetary policy to a “restrictive” stance and that this is best done incrementally, but “relatively quickly.”

The head of one of three Federal Reserve Banks who dissented against delaying rate hikes in late July, she warned it will “take some time” to get inflation down to the Fed’s 2% target and that the longer “elevated” inflation persists, the greater is the risk that a hard-to-reverse “inflationary mindset” will become “entrenched.”

A kind of middle ground was staked out by Boston Fed President Susan Collins, who said  Tuesday “it will be appropriate to raise rates a bit further before the end of the year,” but who laid out “plausible” scenarios in which rates might need to go up more than just “a bit.”

Aside from Warsh and Goolsbee, the Williams and other Fed comments preceded a worse-than-expected Labor Department report showing the Consumer Price Index rose 3.7% from a year earlier in September (2.6% for the core CPI), which negated more encouraging August CPI readings. Equally disturbing was the agency’s Thursday morning report that the Producer Price Index for final demand jumped 1.3% in September, leaving it up 6.3% from a year earlier. Those data do not bode well for calculations of last month’s PCE inflation rate.

Nor was the Fed’s latest survey of economic conditions around the nation reassuring. The “Beige Book” survey, conducted through Oct. 5 for review by the FOMC, revealed a less-than-satisfactory mixture of inflation findings. Three Fed districts reported “robust” price increases; eight reported “moderate” rises and three said “input price pressures were intensifying, if not already growing robustly.”

“Firms in several Districts cited persistent uncertainty around energy and tariffs and expect that prices will increase further in the coming months, as existing contracts expire, and firms must renegotiate hedge contracts for their own inputs and/or delivery contracts to their customers,” the Beige Book added.

Meanwhile, the Beige Book found “little or no change in overall consumer spending.” which has been fueling above-trend growth and low unemployment. Apparent confirmation came Thursday morning from the Commerce Department’s report that retail sales 0.8% in September.

Warsh did not directly address the CPI, PPI or other government reports and, in fact, stressed that he prefers to “look out the window” at what’s going on in the economy currently rather than at “lagged” data about the economy’s past performance.

But without mentioning the statistics, the five-month tenured Fed chief left no doubt where his main concern lies – “the surge in prices that affects all of us.” He noted that inflation is affecting the whole world and that other central banks have joined with the Fed in a “synchronous tightening.”

“At the Federal Reserve, we made very clear that we would deliver price stability and we removed the dose of accommodation about a month ago” to fight inflation, Warsh said.

But, in contrast to top lieutenants who had strongly suggested the FOMC will wait before raising rates again, Warsh said he could not say what the monetary policy committee will or will not do at the end of a two-day meeting on Oct. 28.

“I don’t pre-judge meetings,” he said. “I don’t believe in … saying now what I might do at the meetings that we have in the balance of this year, but that was the situation.”

Since “we came to a judgment” at the September FOMC meeting, Warsh said “the world has broadly conformed to our expectations.”

He said, “We’ll be meeting a couple more times this year, and that will be the crystallizing moment in which we’re going to look out the window,” he continued. “What do we see? What’s happening to output? What’s happening to employment? What’s happening to inflation?”

Goolsbee, who will vote on the FOMC next year, was more open in his reaction to the CPI report, although he stopped short of saying he would support a late October rate hike.

After calling the CPI report “”discouraging” for both August and September, he told Yahoo Finance he’d like to “get more data” before deciding what or when the FOMC’s next move should be, but he warned “If the through line on inflation is this 4% core inflation, then that’s not acceptable. That’s not compatible with the Fed target, and our policy needs to address that.”

“If we get more months like this … that’s totally unacceptable,” said Goolsbee.

“Now we see again this month more evidence that it hasn’t been transitory,” he said. “It hasn’t come down as fast as it was forecast to come down.”

Goolsbee said, “There is no ambiguity if you have a solid and steady real economy and you have inflation that is above the target and going the wrong way; if you have a one-sided violation of the legal mandate of the Fed and you don’t have an employment problem and you do have an inflation problem, there’s no ambiguity about how the central bank has to deal with that.”

“You must prevent the buildup of overheating,” he added.

The FOMC raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.0% on Sept. 16 – nine months after completing a series of rate cuts totaling 175 basis points over 15 months.

FOMC participants, not including Warsh, projected only one more 25 basis point rate hike to a median 4.1% (a range of 4.0% to 4.25%) by the end of this year, where officials anticipate it staying through 2027. However, with Fed officials now forecasting that inflation won’t reach 2% until 2029, market participants are speculating about more rate hikes.

At the time, Warsh described the rate hike as a “start” toward showing the FOMC is “serious” about fulfilling its pledge to “deliver price stability,” implying there’s an indefinite amount of additional tightening to come.

Minutes of the Sept. 15-16 FOMC meeting disclosed that “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end.”

Before the two inflation reports, Williams echoed that expectation Tuesday night in an appearance on Bloomberg, when he said, “I haven’t changed my view that it may be appropriate to have one more rate hike. I don’t think at this time I have any reason to believe that we would need to do more.”

Some interpreted him as meaning he did not think the FOMC would need to raise rates further in 2027, but that is not what a transcript of the interview shows. Williams was initially asked whether he saw an “additional hike at some point later this year. Is that enough?” Then he was asked, “What about 2027?”

After saying he saw no reason “to do more” this year, Williams added, “But you asked 2027, We’ll have to see.”

“I mean, it’s still mid October,” he went on. “This economy is being affected by lots of different influences, and we just have to keep watching the data. And again, the focus is not so much on individual data points or what do you know, but really about what are the underlying underlying trends we’re seeing on the labor side, on the employment side, but also on the inflation side.”

Williams sounded hopeful that the Fed will not have to do a lot more tightening.

“So in terms of have we done enough? Time will tell,” he said. “We’ll get more data to assess that. But my view is this is not an economy that is overheating overall. This is not an economy where it’s adding inflationary pressures beyond these particular shocks that we’re experiencing,”

“And so I think it’s just going to go back to this risk,” Williams continued. “It’s always the risk management of how do we maintain a solid economy growing close to trend, and with inflation not spilling over into broader, more persistent inflation. So it’s really though about keeping that overall balance of supply and demand, which I think is going to be related to this assessment of how is the economy kind of overheating, which I don’t think it is.”

In the labor market, he said he has “not seen indicators of broad overheating,” and said he’s watching to see if “disinflationary trends” continue.

But an agnostic Williams allowed for the possibility that rates may have to go up more than he now expects. “There are scenarios where the economy evolves in a way that you would need to have a higher path of interest rates to best achieve best achieve our goals.”

“There’s also, I would say, equally there are future paths of the economy that would say that you don’t need to do that,” he continued. ‘And we don’t know which one of those scenarios we live in.”

Disputing Fed officials who have said rising bond yields are helping the Fed accomplish its goals, Williams scoffed, “I don’t think they’re doing our work for us.”

Earlier in the week, other officials spoke broadly about the need to curb inflation, but gave conflicting signals on the appropriate time for further tightening.

Hammack displayed her own sense of urgency about tightening monetary policy to combat inflation as she keynoted the annual meeting of the National Association of Business Economics on Monday.

“Based on current conditions, forecasts, and risks to the inflation side of our mandate, I believe a restrictive policy stance will be needed for us to reach our destination in a timely fashion,” she said, before going on to warn about upside risks to inflation and to inflation expectations and strongly suggesting that the FOMC should move with dispatch.

“When feasible, I generally think it’s preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction,” Hammack said.

Many Fed officials, as well as outside observers, have blamed price pressures on a series of “supply shocks,” but Hammack took a more nuanced, less complacent view.

After noting that the price index for personal consumption expenditures, though not as bad as expected in August, was still up 3.4% year-over-year overall and 3.0% for the core PCE, she pointed out that “both readings are above year-earlier levels, when headline was 2.7% and core was 2.9%.”

“That’s not a stray gust; it’s a headwind that’s been with us for a while,” Hammack added.

“I see inflation pressures as relatively broad-based rather than concentrated in one component,” she went on. “Energy has been making headlines this year, with prices rising for oil, retail gasoline, and diesel, but it isn’t the whole story …. .Multiple waves of tariff rate increases have resulted in a series of cost shocks.”

Moreover,“it’s not just the supply side,”  Hammack said, “Demand-side pressures coming from the AI buildout are raising prices on key computer, electronic, and high-tech components” and not just for data centers.

In her Fourth Federal Reserve district, she said she’s “hear(ing) about additional cost pressures in health insurance, plastics, metals, grains, electricity, and other areas” and said she’s also seeing price pressures “core services inflation excluding housing, a category that shouldn’t be especially exposed to tariffs or energy.”

Hammack said she’s picking up up on business plans to “increase prices by more than their current input costs have increased.”

“They know there’ll be more inflation coming, they just don’t know from where,” she continued. “This could be a sign that an inflationary mindset is taking hold.”

Such findings have Hammack worried, she confessed to hundreds of NABE members meeting in Cleveland.

“Because of the breadth of inflationary pressures, my baseline forecast is that it will take some time for inflation to return to 2%, even with appropriate monetary policy,” she said. “A leveling off or decline in energy prices would certainly help move inflation in the right direction, but the demand-side pressures are not self-correcting. They are likely to be more persistent and usually require a more restrictive policy to reign them in.”

Since becoming Cleveland Fed president two years ago, “the economy has experienced a number of upside inflation developments, and the risks still appear to be skewed in that direction,” she said.

Echoing a familiar Fed line, Hammack said that “so far, long-run inflation expectations have stayed remarkably well anchored despite actual inflation being above target for more than five years.”

“But I’m not taking that for granted,” she added. “With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy.”

“When people expect higher prices, they make decisions with this in mind,” she warned. “It can become a self-fulfilling prophecy that makes it harder for monetary policy to bring inflation back down.

Hammack suggested the FOMC has latitude to act resolutely against inflation, saying that “the stable labor backdrop gives me room to address these inflationary concerns.”

Besides, she described “financial conditions as neutral rather than holding demand back.”

So, she implied, there is nothing preventing the FOMC from continuing to tighten monetary policy, although she did not say by how much.

“None of this reads to me as an economy in which the crew are exhausted and the boat is taking on water,” Hammack said, using a nautical analogy. “It reads, instead, as one that can handle a tighter hand on the tiller to finish the job on inflation.”

“Considering all the inputs that factor into my reaction function, a restrictive monetary policy stance is appropriate to ensure a timely return to 2% inflation,” she elaborated. “Trimming the sails through frequent smaller adjustments reduces the risks of being blown far off course, of an inflationary mindset taking hold, and of taking longer to reach the destination.”

By contrast, Waller insisted in a Bloomberg appearance Tuesday that inflation expectations are “well anchored” and said the rise in bond yields “is not coming from an inflation premium,” but “is ​a factor of real growth.”

Collins said Tuesday she “expect(s) that it will be appropriate to raise rates a bit further before the end of the year to ensure a timely and durable return of inflation to the Committee’s 2% target,” but she didn’t rule out having to raise rates more than just “a bit.”

She told a Boston Fed community banking conference that her “modal scenario” is one in which the economy “continues to feature healthy GDP growth, with the labor market remaining near full employment,” and in which “inflation gradually returns to 2%, as continued efficiency gains support the balance between demand and supply, and contribute to disinflation.”

However, Collins, who will return to the FOMC voting ranks in 2028, also presented two other “plausible’ scenarios, which she deemed “almost as likely,” that would have less favorable inflation outcomes.

“In one scenario, stronger-than-expected demand from AI generates even greater investment in data centers,” she said. “The related prospect of higher productivity fosters continued stock price increases, further boosting household spending. As a result, even with additional efficiency gains, demand outpaces supply, the labor market overheats, and inflation remains persistently above target.”

In another scenario, Collins said “additional pressures from tariffs, energy prices – or both” could generate “inflation challenges that become even more acute.”

“In particular, the lack of a resolution to the conflict in the Middle East reinforces this possibility,” she continued. “It is also important to note that continued elevated energy prices could boost domestic oil production.”

“As a result, unlike energy shock episodes prior to the 2000s, higher inflation might not be accompanied by a significant decline in economic activity,” she added.

Collins acknowledged that “recent inflation readings include some promising news,” but said “other developments have been less favorable.” Like many of her colleagues, she voiced particular concern about AI-related demand pressures on an array of costs.

In deciding how much higher rates might need to go, she said the FOMC will need to “monitor whether elevated inflation remains largely confined to energy and AI-buildout-related categories, while price growth continues to moderate elsewhere – or whether evidence of price pressures broadens.”