FOMC Watch – Warsh doubles down, risks crying wolf
Kevin Warsh just held a critically important speech at Jackson Hole. Warsh was under pressure, predominantly because of his failure to communicate clearly in the latest FOMC press conference, where he failed to explain why the FOMC held rates steady, despite three dissents, and where he failed to give a clear inflation target. Markets were looking for a clear inflation target, and a framework for understanding his reaction function. He delivered only partially.
He did confirm the 2% PCE inflation target, even if he spent a lot of time on alternative statistics he likes to look at. On the other hand, he pushed back actively against giving a reaction function, saying ‘… then how about the new Fed Chief commits to an explicit reaction function? Surely, he should tell us his interest rate path if the data were to come in hot or cold. I wish our understanding of the economy was so precise as to provide a mechanical tried and true answer.’ He doubled down on not providing any such guidance. On the other hand, he did point out that work was needed to get inflation down, saying ‘we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.". a But he subsequently again failed to explain why the FOMC has yet to take action.
In contrast to the press conferences, he did provide his reading of the economy, which overall can be construed as hawkish. On the labour market side, he focused on low jobless claims, and the low unemployment rate, without the participation caveat. On the other hand, inflation was characterized as elevated in a variety of ways, ranging from the level, the number of categories which saw substantial price rises, to the lack of pace on progress over the past few months, saying that he did not judge that underlying trends had meaningfully improved.
Beyond that, there were few surprises, given his two press conferences and Congressional testimony. He talked about AI, mainly reflecting on the questions that his task force is handling. He talked about forward guidance, trying to make the case for getting rid of it. He talked about the role of financial markets and gave a not-so-subtle nod to Treasury Secretary Bessent that he felt prices should give ‘as unfiltered as possible’ signals, obviously without mentioning recent buyback intervention announcements. He also reaffirmed that the short term rate is the main instrument, and that unconventional policies may suit crises, but should not be used at other times.
While Warsh spoke, the annual non-farm payroll revision was announced. The past years saw substantial downward revision. Consensus expectation was that the total would be raised, but the actual showed that the initial 211k jobs in the year through March were in effect only 132k, a mere 11k a month.
Markets evaluated the speech as hawkish, moving up the pricing of a September rate hike. In our view, the tone was clearly hawkish, but he has sounded hawkish before without acting. Indeed, Warsh sounded hawkish the way he’s sounded hawkish in the past months, emphasizing elevated inflation, arguing it is the Fed’s responsibility, but failing to actually act. He sounds hawkish, but at the same time, the economic situation now is hardly different than it was in July. Moreover, he purposefully toned down any commitment to a rate hike, saying ‘I stand here committed to a discipline, not a decision.’ Still, he’s moved expectations, and unless incoming data drastically alters the outlook, not supporting a rate hike in September will cost him credibility. The CPI report on September 11th faces a high hurdle to change the Fed’s reading of recent inflation trends.