8 Words From Fed Chair Kevin Warsh That Signal Where Interest Rates Are Headed

Inflation has been running hot for several years. The normal way the Federal Reserve attempts to cool inflation down is to increase interest rates. The problem is that being too aggressive with interest rate increases can push the economy into a recession. The Fed is constantly walking a tightrope, and today's environment is no different. Fed Chair Kevin Warsh just made clear that the fight against inflation isn't over yet.

One month doesn't make a trend

As the chairman of the Federal Reserve, Kevin Warsh's words are heavily scrutinized. He also has to make regular appearances before Congress to answer questions, giving investors a lot to examine. One reply from his first appearance before Congress since being appointed as Fed Chair stands out: "There might be some that look at this morning's data and say, 'mission accomplished.' That is not my view."

Image source: The Federal Reserve.

The eight words from that reply that are important are "...say 'mission accomplished.' That's not my view." They are important because the June inflation data was directionally positive, with the Consumer Price Index (CPI) falling. The problem is that much of the decline was due to lower gasoline prices. Warsh is basically saying that one month doesn't make a trend and that he and the other members of the Fed board are still worried.

With the conflict in the Middle East flaring again and pushing energy prices higher, continued vigilance on the inflation front is clearly the right approach. Moreover, the Producer Price Index (PPI) is still quite high, so businesses continue to face elevated prices, which will likely be passed on to consumers over time. While the CPI looked good at a high level, there are clearly negative trends to consider.

Core CPI is above target

From a long-term perspective, the Federal Reserve has been targeting core inflation of around 2%. Even with the drop in June, when CPI fell from 4.2% in May to 3.5%, and core CPI dropped from 2.9% to 2.6%, inflation is still above where the Fed would like it. Meanwhile, Warsh was pretty clear that he continues to monitor key headwinds, such as rising energy prices and elevated business inflation.

That doesn't mean that the Fed is going to increase interest rates, per se. However, it does hint that interest rate cuts are likely on hold, with the bias clearly tilted toward rate increases. Interest rates aren't a scalpel, however. As a fiscal tool, they are more like a sledgehammer. So, Warsh is making clear that he and the Fed will take a careful, measured approach to rate changes. In the end, that's probably the best investors can hope for, anyway.

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