Fed’s inflation gauge jumps again, pressure on Warsh

The Federal Reserve is back under “inflation siege” as its preferred price gauge surges to the highest level in nearly a year, dealing a major blow to market expectations for imminent interest rate cuts, according to the chief executive of a leading financial advisory. April PCE inflation rose to 3.8%, the highest since May 2023, while core PCE climbed to 3.3%, its strongest reading since October last year. Both measures now sit far above the Fed’s 2% target and land at a defining moment for newly installed Fed Chair Kevin Warsh. “The inflation rebound leaves the Federal Reserve facing a brutal policy reality. The inflation story has turned again and the Fed can’t just ignore it,” said Nigel Green, CEO of deVere Group. “Markets spent months convincing themselves rate cuts were inevitable. Inflation data like this destroys that argument. The 3.8% is nowhere near target. Core inflation above 3% confirms price pressures are spreading deeper across the economy.” The latest figures arrive as energy prices climb on escalating geopolitical tensions involving Iran, while resilient consumer spending, elevated wage growth and massive investment across AI and tech continue to fuel demand across the US economy. Treasury yields moved higher immediately after the inflation data as investors rapidly repriced expectations for monetary policy. Green said investors are underestimating how aggressively the Fed may now need to respond. “The market has been addicted to the idea of easier money returning quickly. Inflation is now telling policymakers the opposite,” he warned. “Kevin Warsh takes over the Fed at one of the most dangerous moments for central bank credibility in years. “He inherits stubborn inflation, volatile energy markets, political pressure from the White House and financial markets demanding rate cuts the data no longer supports.” The deVere founder and CEO explained that Warsh has repeatedly argued in recent years that the Fed waited too long to confront inflation after the Covid pandemic and allowed price pressures to become embedded across the economy. He has also publicly supported a tougher stance on inflation and tighter monetary discipline. Those positions now leave the new Fed chair with little room to soften his approach. Credibility “Warsh built much of his credibility criticising the Fed for falling behind inflation. He can’t arrive as Chair and suddenly pivot dovish while inflation accelerates again. “If the Fed looks hesitant now, markets will conclude policymakers are willing to tolerate structurally higher inflation. Central banks cannot afford that perception.” Federal Reserve officials are already signalling growing concern. Governor Lisa Cook said this week she would support further rate hikes if inflation fails to cool, underlining how rapidly the policy debate is shifting back toward tightening. Nigel Green said the possibility of another rate hike is now firmly back on the table. “Just months ago, investors were debating how many cuts the Fed would deliver in 2026. Now, policymakers are openly discussing whether rates may need to move higher again. That is a dramatic repricing of reality. “Risk assets have spent years operating under the assumption the Fed will always step in with easier policy. Inflation at these levels changes the entire investment backdrop.” He added that Donald Trump wants lower rates, Wall Street wants lower rates, and consumers want relief from borrowing costs. “But none of those pressures change the inflation data confronting the Fed.” “Warsh has consistently defended Fed independence. Markets are now about to discover whether he is prepared to prove it.” Green concluded that the U.S. central bank is increasingly likely to keep rates elevated for longer than markets currently expect as officials attempt to stop inflation becoming entrenched again across the economy. “The Fed already lost control of inflation once this decade. Policymakers know the consequences of making the same mistake twice.” The post Fed’s inflation gauge jumps again, pressure on Warsh appeared first on Financial Mirror.