Federal Reserve Chairman Kevin Warsh warns inflation is not slowing

Kevin Warsh has been running the Federal Reserve for roughly three months, and he’s already made one thing abundantly clear: he’s not interested in declaring victory over inflation anytime soon.

65 months and counting

Inflation has now exceeded the Fed’s 2% target for more than 65 consecutive months, a streak that stretches back to 2021. The persistence of above-target price growth has become the defining challenge of Warsh’s early tenure, and he’s framing it in starkly moral terms.

During congressional testimony on July 14, Warsh declared a “no tolerance” policy for elevated inflation, characterizing the current price environment not as an accident of circumstance but as a “choice” that requires deliberate reversal.

At an earlier forum on July 1, Warsh acknowledged that some inflation risks had begun to ease. But he was quick to add that the Fed would not accept readings above 2%, effectively shutting down any speculation that the central bank might quietly raise its comfort zone.

This is a meaningful departure from the approach of his predecessor, Jerome Powell, whose tenure was shaped by the flexible average inflation targeting framework adopted in 2020. That framework essentially gave the Fed permission to let inflation run hot for a while to make up for periods when it fell short of 2%. Warsh has publicly criticized that strategy, arguing it contributed to the inflationary surge that followed.

A divided committee, a steady rate

The Federal Open Market Committee met on July 28-29 and voted to hold the federal funds rate steady at 3.50%-3.75%. But the decision was far from unanimous. Three FOMC members dissented, each favoring a 25 basis point increase.

Warsh has also launched internal task forces focused on inflation measurement and communications, reflecting an aim toward establishing a more disciplined monetary policy environment.

What this means for markets

For equities, a Fed that’s willing to keep rates elevated, or push them higher, puts a ceiling on valuation multiples. Growth stocks, which depend on low discount rates to justify their lofty price tags, are particularly vulnerable in this environment.

Fixed-income assets become more attractive as yields rise. For investors who spent years starving for yield in the post-2008 era, rates in the 3.50%-3.75% range (and potentially higher) offer returns that actually compete with equities on a risk-adjusted basis.

Complicating the picture further are external variables that Warsh can’t control. Geopolitical tensions in the energy market continue to create supply-side inflation pressures, the kind of price increases that monetary policy is particularly blunt at addressing. Meanwhile, a surge of investment into artificial intelligence infrastructure is creating its own set of demand pressures, with capital spending on data centers, chips, and related hardware running hot.

As Warsh prepares for his upcoming Jackson Hole speech, the address traditionally used by Fed chairs to signal major policy direction, markets will be parsing every sentence for clues about whether the next move is a hike, a hold, or something unexpected.

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