The Fed is ready to raise its rates if US inflation does not decline

Kevin Warsh, the new chairman of the US Federal Reserve, warned at the Jackson Hole symposium that the central bank would have "work to do" if price pressures did not ease sufficiently. Markets are now anticipating an interest rate hike as early as September.

This was his first speech at Jackson Hole, and Kevin Warsh didn't try to reassure anyone. The chairman of the Federal Reserve said on Saturday that if monetary policymakers weren't convinced that inflation was receding, "there would be work to be done." A deliberately cautious formulation, but one that the markets immediately interpreted as a signal of an interest rate hike.

The latest available figures show that prices rose 3,4% year-on-year through July, above the Fed's 2% target. Another inflation indicator closely monitored by the institution, PCE (Personal Consumption Expenditure), came in at 3,7%. Warsh judged that these summer readings, while better than expected, did not indicate a "significant improvement" in the situation.

"Here is my criterion: we must be confident that underlying inflation is converging towards our target, clearly and at sufficient speed. Otherwise, we have work to do," he told central bankers, government officials and academics gathered in Wyoming for this annual event.

Warsh was careful to clarify that his remarks did not constitute "forward guidance," the practice of sending signals to markets about future interest rate decisions, adopted after the 2008 financial crisis. He believes that this method has "gone on for too long" and that "excessively sharing deliberations and committing too early to future decisions can mislead markets, businesses, and households."

The next Fed meeting is scheduled for September 15 and 16. Following Warsh's speech, CME data shows that expectations of a rate hike at this meeting have increased significantly. Analysts at Capital Economics believe the speech delivered a "much clearer and more restrictive" message than anticipated, leaving "the door open for a hike" sooner than expected.

Interest rates remained unchanged, between 3,5% and 3,75%, at five consecutive meetings, largely due to soaring oil prices linked to the conflict between the United States and Iran. This rise in energy costs also fueled tensions in bond markets, where investors demanded higher yields, increasing borrowing costs for the federal government, businesses, and ultimately for households through mortgages, auto loans, and credit cards.

The US national debt has surpassed $40 trillion, a figure that has doubled in a decade under the Trump and Biden administrations. According to the Congressional Joint Economic Committee, this debt is increasing by approximately $90,000 per second, or $7,8 billion per day. Treasury Secretary Scott Bessent announced a debt purchase program to try to lower borrowing costs, but the market reaction to this announcement was short-lived.

Appointed by Donald Trump last May, Warsh inherits a delicate situation. The US president had regularly pressured his predecessor, Jerome Powell, to lower interest rates, claiming that hikes "keep the country afloat." With the midterm elections on the horizon and voters' concerns about purchasing power, every decision by the Fed will be closely scrutinized at the White House.