Fed Chair Warsh indicates hawkish shift, puts inflation back at centre

Kansas City: US Federal Reserve Chairman Kevin Warsh on Friday put inflation firmly at the centre of monetary policy, saying the central bank needs to be confident that underlying price pressures are moving towards its two per cent target at a sufficient pace, or further policy action may be required.

"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said in his keynote address at the Federal Reserve's annual Jackson Hole symposium.

Warsh said the Fed's "predominant focus right now should be on prices", noting that inflation remains above its target and that better-than-expected readings during the summer had not convinced him that underlying inflation trends had meaningfully improved.

He reaffirmed that the Fed's 2 per cent inflation objective, measured by the Personal Consumption Expenditures price index, remains a "firm fixed target", adding that delivering stable prices was the central bank's responsibility.

Warsh stopped short of signalling the Fed's next interest-rate decision, saying, "I stand here today committed to a discipline, not a decision."

His assessment of the broader US economy remained strong. Warsh said the economy appeared to have strengthened, with business capital expenditure rising rapidly and consumer spending remaining healthy.

Labour markets were broadly consistent with full employment, with the unemployment rate at 4.1 per cent.

Warsh also said broad financial conditions could hardly be described as restrictive, pointing to strong credit markets and relatively easy lending conditions.

He also pushed back against routine forward guidance from the Fed, saying the practice had "outstayed its welcome" in normal times and warning that repeated commitments about future interest rates could constrain policymakers when economic conditions change.

At the Fed's July meeting, Warsh said a "good majority" of policymakers preferred to wait for additional information before deciding whether a change in interest-rate policy was warranted, while remaining ready to act as circumstances required.