Federal Reserve Chair Kevin Warsh used his inaugural Jackson Hole address on Friday to signal a hawkish stance on inflation, prompting financial markets to reprice interest rate odds. Warsh noted that consumer price growth has remained above the central bank’s target for 65 months.
Warsh Delivers First Jackson Hole Address as Fed Chair
Federal Reserve Chair Kevin Warsh took the podium in Jackson Hole at 10 a.m. Eastern on Friday for the first time in the job, and the twenty minutes that follow may matter more to New Jersey borrowers than any speech he has given so far. Warsh became the seventeenth chair of the Federal Reserve on May 22, succeeding Jerome Powell. He has presided over two policy meetings since then and left the benchmark rate alone at both, holding it in a range of 3.50 percent to 3.75 percent. Friday is his first extended public statement of how he reads the economy rather than a post meeting summary of what the committee decided. The Kansas City Fed hosts the symposium every August in Wyoming. This year it runs from Wednesday through Saturday and has drawn roughly 120 officials and economists from more than 70 countries. The formal theme is financial innovation and what it means for payments and policy, though the audience is there for the chair.
Two numbers frame the speech. Inflation is running at 3.4 percent, still well above the 2 percent target the Fed has held to for years. And the 30-year Treasury yield touched 5.31 percent on August 17, its highest reading since 2007. That second figure is the unusual one. Long term yields normally drift down when investors expect the central bank to ease. Rising long term yields alongside a paused policy rate suggest the bond market is worried about something the Fed has not yet addressed, whether that is the supply of new government debt, the durability of inflation, or the Fed’s own independence. Whether Warsh acknowledges the move at all is one of the things economists will be listening for. The other is which risk he leans on. Labor market conditions have started to soften while inflation has stayed sticky, and those two facts pull monetary policy in opposite directions. A chair who spends his time on price stability is signaling one path. A chair who spends it on employment is signaling another.
Hawkish Pivot and the Debate Over a September Rate Hike
Warsh renewed his inflation-fighting credentials by pointing out that inflation has stayed above the Fed’s 2% target for 65 months. He stated that the central bank would have work to do if prices continue to rise. US Federal Reserve Chair Kevin Warsh’s hawkish Jackson Hole speech on Friday eased fears that the central banker wouldn’t raise interest rates to tackle inflation, as the odds of a September hike jumped. The government’s next price report, to be released just days before the meeting, could play an outsize role in determining whether the central bank acts.
While Warsh opened the door to raising borrowing costs, he did not commit to any particular timing. It’s not surprising given his aversion to sending signals about the Fed’s next moves the way his predecessors did, which Warsh felt boxed the Fed in to a preset path. Some analysts, however, saw strong hints that a rate increase in September is a real possibility. Warsh noted that he and other Fed officials who supported keeping rates unchanged at their July 28-29 meeting thought the wiser course was to await new information in the intermeeting period … before deciding whether a change in interest rate policy was advisable.
That suggests that Warsh wanted to see clear evidence of cooling inflation after the July meeting to remain on hold. Yet elsewhere in his remarks he said that such evidence hasn’t emerged — even as gas prices have come down somewhat, underlying inflation hasn’t meaningfully improved.
By sending such signals, Warsh has raised expectations for a hike next month. If inflation remains high and he doesn’t follow through, his credibility could take a hit.
The speech immediately shifted market expectations. Traders currently put roughly one in three odds on a rate increase at the September 16 policy meeting.
Analysts on Forward Guidance and Credibility
Though Warsh was keen not to provide forward guidance… his words smacked of forward guidance,
ING analysts wrote. The apparent pivot went a long way towards assuaging doubts,
a Financial Times columnist noted. But Warsh’s aversion to forward guidance will be harder to maintain with each speech like Friday's,
Semafor’s DC team wrote, as political pressure to ease borrowing costs mounts ahead of November’s midterm elections.
Adam Posen, president of the Peterson Institute for International Economics, offered a stark assessment of the stakes: You are basically setting yourself up so that if you don’t hike in September, people may ask what’s going on.
Warsh’s high-profile speech at the Fed’s annual Jackson Hole economic conference was mostly praised afterward by economists and other Fed policymakers in attendance. Still, there was also some pushback and criticism during the first day of the conference, which ends Saturday.
Market Reaction and the Response in Treasury Yields
Bond markets reacted promptly to the hawkish signals.
