Fed Chief Warns That Inflation Isn’t Slowing

Happy Friday! Here's what we're watching as we contemplate a late-summer getaway to the beautiful shores of Lake America, formerly known as Lake Ontario.

Warsh Says Fed Has 'Work to Do' to Fight Inflation

In a highly anticipated speech at the annual Jackson Hole Economic Symposium on Friday, Federal Reserve Chair Kevin Warsh told the gathering of central bankers that inflation isn't slowing meaningfully and vowed to do what it takes to push it down to the target rate of 2%.

"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do."

Warsh reviewed the state of the economy, saying that business profits were strong and the labor market appears to be at or near full employment. Accordingly, Warsh said, the Fed needs to focus on the first part of its dual mandate, price stability.

Although Warsh has criticized the idea of the Fed providing forward guidance on its plans and did so again on Friday as he called for "a quieter Fed," his comments were seen as a sign that the central bank is both worried and serious about fighting inflation, suggesting to many listeners that Fed officials would raise interest rates this year, perhaps as soon as September.

Warsh's hawkish commentary sent the odds of a rate hike next month sharply higher, with investors pushing the probability of a hike from about 35% to more than 55% on the CME FedWatch tool.

A "hinge point in history"? Early in his remarks, Warsh raised the possibility that artificial intelligence is a revolutionary technology that could send the economic growth rate soaring.

"The potential for substantially higher growth is on the rise. Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts," he said. "The Fed watches all of this attentively. We recognize that AI is a new variable-potentially a new factor of production-that will have consequences for both the economy and the conduct of monetary policy."

Warsh has created a task force to study the issue. In previous comments, he suggested that a significantly higher growth rate could raise productivity, and thereby lower inflation by reducing costs.

What the analysts are saying: Market watchers seemed pleased that Warsh emphasized inflation - a focus that could set the central bank on a collision course with President Trump, who has long called for lower interest rates. Rates on short-term debt jumped after Warsh's speech as investors weighed the odds of inflation-fighting interest rate hikes, while long-term rates stabilized.

Diane Swonk, chief economist at KPMG, said Warsh reassured investors that he is serious about inflation. "The speech was a move to restore confidence in the Fed 's independence and resolve on inflation amidst an economy that has surprised with its resilience," she said on X.

"I would say Warsh was successful in reestablishing confidence," said Larry Holzenthaler at Catalyst Funds, per Bloomberg. "He came across as very focused on inflation and bringing it back in line with the Fed's 2% target. The market seems to be reacting exactly the way the Fed wants."

Carl Weinberg, chief economist at High Frequency Economics, agreed that the speech was largely a success. "We believe that markets heard what they needed to hear to believe that Warsh will tighten monetary conditions to restrain inflation, and that he will encourage the [Federal Open Market Committee] to pull the trigger soon," he said in a research note, per ABC News.

Number of the Day: 6

The United States hit a grim milestone Friday, with war against Iran concluding its sixth month. At the start of the war on February 28, President Trump said the war would last "four to five weeks"; he recently said he is now prepared to continue the war for as long as necessary.

The war has become a stalemate, with Iran sharply restricting tanker traffic through the Strait of Hormuz while the United States runs a blockade on what little ship traffic remains. The conflict has cost billions of dollars, severely strained the U.S. military and pushed up energy prices around the world. It is also widely unpopular in the United States. A Reuters/Ipsos poll released this week shows that only 31% of Americans approve of the military operation, a low point driven by more Republicans turning against it.

Sen. Jack Reed, a military veteran who serves as the senior Democrat on the Armed Services Committee, put out a statement marking the 6-month anniversary in highly critical terms. "When he unilaterally launched this war, Trump promised he would destroy Iran's nuclear program, eliminate its missile and drone arsenal, dismantle its defense industrial base, wipe out its proxy networks, and topple the regime in a matter of weeks," he said. "Six months later, not a single objective has been achieved. Indeed, he has weakened our position in the Middle East and the world significantly."

Weak Outlook Hits Consumer Confidence in August

Consumer confidence fell in August, according to the final monthly report from the University of Michigan released Friday. The consumer confidence index ended at 51.7, 6.3% below its level in July and 11.2% below its level a year ago.

Inflation, trade tensions and the war against Iran played central roles in the decline, with survey respondents reporting that they are concerned that inflation "will remain elevated for the foreseeable future," said Joanne Hsu, director of the survey.

"Sentiment declines in August were seen for all political groups and were particularly acute among Republicans," Hsu said. "Moreover, groups who are typically less-equipped to absorb increases in cost of living also exhibited stronger decreases in sentiment, including older consumers, lower- and middle-income consumers, and those with no stock holdings."

Consumers are worried about more than just their pocketbooks. "[T]hey are increasingly worried that prospects elsewhere in the economy could be weakening," Hsu said. Expectations of business conditions a year from now fell 10%, while the five-year horizon saw a 13% drop.

Fiscal News Roundup

• Warsh Says Inflation Isn't Slowing, Vows to Reach 2% Target – Bloomberg
• Trump's New Fed Chair Walks Fine Line on Inflation in Key Speech – NBC News
• Investors Expect Higher Rates After Fed Chairman's Inflation Pledge – New York Times
• After 6 Months of War, Iran's Battered Regime Remains Entrenched – NPR
• Trump Used to Say He Saw a Quick End to His Iran War, but 6 Months Later He Claims He's in No Hurry – Associated Press
• Pentagon Is in Talks With Venezuelan Mogul for Massive Oil Deal – Bloomberg
• A Venezuelan Oilman Faced a Swiss Arrest Warrant. The US Had Other Plans for Him – Washington Post
• Trump Signs Executive Order to Create a US Space Academy – CBS News
• Milo Yiannopoulos, Far-Right British Commentator, Detained by ICE – ABC News
• Trump Administration Considering Deal to Give up Part of Yosemite National Park – Washington Post

Views and Analysis

• Kevin Warsh Said the Right Things. Now What? – Jonathan Levin, Bloomberg
• Wall Street Loved Scott Bessent and Kevin Warsh. Not Anymore – Catherine Rampell, New York Times
• In Trump's Washington, Ballooning National Debt Stirs Little Action – Peter Baker, New York Times
• Buckle In America - Iran War Costs Are Steep and Growing – Michael, Forbes
• Where Trump's Tariffs Hit Hardest – Brad Jennings, Axios
• The Rich Don't Need That Retirement Check – Andrew G. Biggs, Washington Post
• Trump vs. the Bond Market – Ezra Klein and Robin Wigglesworth, New York Times (podcast)
• Corporate America Cut Big Checks to Trump. Now CEOs Fear Subpoenas Are Coming – Annie Linskey and Emily Glazer, Wall Street Journal
• Beware the Coming Consumption-Tax Storm in America – Joseph C. Sternberg, Wall Street Journal
• The Texas Senate Race Is Becoming a Debt Debacle – Abby McCloskey, Bloomberg