US Federal Reserve Chair Kevin Warsh said Wednesday that a strengthening economy, persistent inflation and heightened geopolitical risks prompted the central bank to raise interest rates after keeping them unchanged at its previous meeting.
Asked what had changed during the seven weeks between meetings, Warsh said recent data, particularly labor market indicators, showed that the US economy had strengthened.
Inflation trends during the summer, meanwhile, failed to demonstrate sufficiently rapid progress toward the Fed's 2% target, while the geopolitical outlook also changed, he said without referring to the US-Iran war.
"All three of those things lent themselves to a firm, unanimous decision today," said Warsh.
The Federal Open Market Committee (FOMC) unanimously raised the federal funds rate Wednesday by 25 basis points to a range between 3.75% and 4%, following its decision to hold rates steady in July.
Warsh said the unemployment rate remained low at 4.1%, with job openings and average weekly hours increasing, allowing the Fed to concentrate on the price stability side of its dual mandate.
"The plain fact is that inflation is too high, and has been for too long," he said. "This summer's inflation readings do not tell me that underlying trends have meaningfully improved."
Based on the latest consumer and producer price data, annual headline personal consumption expenditures inflation was likely around 3.6% in August, while core PCE inflation was running at approximately 3.2%, he said.
Too many categories continued to register price increases above 3% on six- and 12-month bases, Warsh added.
The rate increase removed "a dose of accommodation," said Warsh, adding that he and other policymakers were "hard-pressed" to describe broad financial conditions before the meeting as restrictive.
He dismissed suggestions that the Fed had followed financial markets, which had largely priced in the increase.
"We made this decision today based on our assessment of the situation," he said, citing the employment trajectory and the economy's underlying strength.
Warsh declined to signal whether the move would begin a series of increases, saying he was "not in the forward guidance business."
He also said estimates of the neutral interest rate had no operational effect on the Fed's decisions.
Median projections released after the meeting showed real gross domestic product expanding 2.3% this year and 2.4% next year.
Headline PCE inflation was projected at 3.7% this year before easing to 3.2% next year, while unemployment was expected to remain around 4.1%.
The median policymaker forecast placed the federal funds rate at 4.1% at the end of this year and next.
Warsh said he did not submit his projection and emphasized that the forecasts belonged to his 18 colleagues.
Warsh attributed rising long-term Treasury yields partly to stronger economic activity, increased competition for capital amid heavy technology-sector investment and geopolitical tensions.
The Fed also established an artificial intelligence task force that is expected to report by year's end on the technology's implications for the economy and monetary policy, he added.
