Federal Reserve Chair Warsh [Reuters=Yonhap News file photo]

Kevin Warsh, Chair of the U.S. Federal Reserve, stated on the 1st (local time) that the risk of inflation in the United States has recently decreased and that inflation expectations have also trended downward.

While these remarks contrast with market expectations that the Fed might raise interest rates within the year, Chair Warsh cautioned against pre-judging monetary policy.

Participating as a panelist at a central bank forum hosted by the European Central Bank (ECB) in Sintra, Portugal, Chair Warsh stated, "Over the last four weeks, inflation expectations (the price increase projections of economic entities) have come down," adding that "the risk of inflation has also decreased."

This is interpreted to mean that as the U.S. and Iran entered a state of de-escalation, international oil prices stabilized rapidly, leading to a corresponding decline in inflation risks and outlooks.

While noting that the impact of the oil price surge during the conflict "can be observed from the demand side in the short term," he emphasized that "it is the central bank's job to judge whether it is 'inflationary.' We must see if it spreads broadly across goods and services."

Nevertheless, Chair Warsh added, "If you look around, you can see that prices are too high," noting that among the central bank governors on the panel, "I am likely not the only one who has reaffirmed the commitment to achieving price stability."

He further remarked, "If anyone thought that central banks would be satisfied with targeting inflation above 2%, they would likely be disappointed."

The Federal Reserve's inflation target is 2%. The Personal Consumption Expenditures (PCE) price index, which the Fed considers a core measure of inflation, rose 4.1% year-on-year in May, marking its highest level in over three years. However, this figure does not yet reflect the recent drop in oil prices.

While these comments could be interpreted as keeping the door open for a potential rate hike, when asked by the moderator if President Donald Trump—who appointed him—was demanding interest rate cuts, Chair Warsh replied, "We are an independent central bank," adding, "There will be no change in that."

When asked if his comment that "prices are too high" signaled a rate hike at the Federal Open Market Committee (FOMC) meeting scheduled for the 28th–29th of this month, Chair Warsh refused to answer, stating, "You are trying to bait me into breaking my principles, but that will not happen."

This reaffirmed the policy of abandoning "forward guidance," the practice of signaling the future path of monetary policy.

Chair Warsh cautioned against pre-judging the direction of monetary policy, stating, "We (the FOMC members) look forward to a good 'fierce family debate' when we meet in four weeks," and added, "We will have a good discussion once we go into the room and close the doors, but there is not much more I can say beyond that right now."

Chair Warsh emphasized his long-held view that the Fed must reduce its balance sheet, which has ballooned to $6.7 trillion (approximately 10.4 quadrillion won) due to quantitative easing policies that increased market liquidity and lowered long-term interest rates to overcome economic crises.

He noted, "It took about 18 years to reach the current size of the massive balance sheet. (Quantitative easing) has moved into a territory close to fiscal policy," adding that "it will take much longer than 18 weeks to reduce it to an appropriate size," signaling a gradual reduction plan.

He continued, "Interest rates (rather than quantitative easing) should be the core instrument for conducting monetary policy," stating that interest rate adjustments, which affect market rates broadly and evenly, are the "policy tool that is applied most fairly to all citizens."

Chair Warsh assessed the rapid growth of Artificial Intelligence (AI) as a "massive paradigm shift for our policy operations and the economy at large," stating that "this revolution is in the first or second inning (of a baseball game)."

He countered concerns about job losses due to AI, saying, "Who could have known when the internet first emerged that it would create 1.5 million jobs, such as Uber drivers?" adding that "there will be even more jobs" as a result of AI advancement.

This event, which marked Chair Warsh's debut on the international stage since taking office, was also attended by ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem.