Fed Chair Warsh says Fed has more work to do unless confident underlying inflation is moving towards 2% objective

OUTLOOK FOR INTEREST RATES Fed has work to do unless underlying inflation is moving clearly towards 2% objective at sufficient speed July FOMC expressed readiness to act as circumstances might require POLICY STANCE Fed’s predominant focus now should be on prices Short-term interest rates should remain Fed’s predominant tool for achieving dual mandate Unconventional policies should be used sparingly, if at all, outside genuine crises FORWARD GUIDANCE July FOMC majority judged it wiser to await new information before deciding whether rate-policy change was advisable July FOMC wanted information on supply chains, investment flows and geopolitics before reconsidering rates Forward guidance should be limited and circumscribed in normal times Quasi-commitments on rates can inhibit policymakers’ freedom to make appropriate decisions BALANCE OF RISKS The price-stability side of mandate is more concerning while labour markets remain consistent with full employment Recent commodity-price rise requires judging whether trends indicate upside inflation risks INFLATION 12-month PCE inflation is 3.7%, six-month rate 4.1%, both above 2% target Fed’s 2% PCE inflation objective is a firm, fixed target Summer PCE and CPI readings were better than expected but underlying inflation trends have not meaningfully improved Inflation progress over past two years has been modest 54% of PCE components rose more than 3% over past 12 months 49% of PCE components rose at annualised rates above 3% over past six months Medium-term inflation expectations are broadly stable and currently well anchored Inflation expectations must be closely monitored to ensure they do not become unanchored Wage growth is moderate but has not proved reliable for predicting future inflation LABOUR MARKET Labour markets are consistent with full employment Unemployment rate is 4.1%, low by historical standards and little changed for several years Unemployment claims are near their lowest levels in decades Low labour-force growth means monthly job gains will naturally run low GDP GROWTH Economy appears to have strengthened and has remained resilient to shocks Business investment in equipment and intangibles rose about 9% over four quarters, fastest since 2021 More than half of this year’s cap-ex growth likely reflects AI-related buildout Real consumer spending rose more than 2% over past four quarters Private domestic final purchases rose at nearly 3% pace so far this year Potential for substantially higher growth is rising FINANCIAL CONDITIONS Would be hard pressed to describe broad financial conditions as restrictive Credit and loan markets show few signs of policy restraint Corporate-bond and leveraged-loan spreads are near low ends of historical ranges Bank standards for commercial and industrial loans are on easier end of historical range Equity-market volatility is low and S&P 500 profits have risen more than 20% over past year OTHER ECONOMIC OUTLOOK AI could become a new factor of production with implications for economy and monetary policy Fed is assessing whether AI will produce a significant, sustained productivity increase and affect employment