Federal Reserve Chair Kevin Warsh kept a September interest-rate hike on the table after his Jackson Hole address, telling the symposium that price stability, not employment, is the Fed's priority right now. Market-implied odds of a September hike jumped within an hour of the speech, and Truist Wealth says the data still show inflation running well above the Fed's target.
Federal Reserve Chair Kevin Warsh left a potential September rate hike on the table following his address at the Jackson Hole Economic Policy Symposium, prioritizing persistent inflation over employment concerns, according to analysts at Truist Wealth. He stopped short of committing to a move at the Fed's September 16 meeting, but his emphasis on returning inflation to the Fed's 2% target flattened the U.S. Treasury yield curve as traders adjusted for a hawkish stance.
Market-implied probability of a September hike jumped from 36% to 56% within an hour of the speech. According to Investing.com: "The Fed's predominant focus right now should be on prices" — Warsh characterized labor markets as stable and consistent with full employment, reducing the urgency for policy support.
Inflation data still running hot
Warsh pushed back on the idea that softer Personal Consumption Expenditures and Consumer Price Index readings mark a structural turn in inflation. He said underlying price trends have not meaningfully improved, warning the Fed still has work to do if inflation doesn't move toward its 2% goal clearly and at sufficient speed.
Truist notes headline PCE inflation is running at 3.7% over the past year and 4.1% annualized over the past six months. Additionally, 54% of the 199 components in the PCE basket rose more than 3% over the past year — down from a post-pandemic peak near 77%, but still above the 32% average of the two decades before the pandemic.
Fed steps back from forward guidance
Warsh signaled a shift away from forward guidance, naming short-term interest rates as the Fed's primary tool for its dual mandate. He said forward guidance and unconventional tools will be used more sparingly than under previous Fed leadership, leaving markets to draw their own conclusions from incoming data.
He pointed to a monitoring dashboard spanning credit spreads, lending conditions, Treasury market liquidity, the dollar, commodity prices, and corporate capital spending, concluding that overall financial conditions remain non-restrictive. Truist's Keith Lerner said the equity bull market remains intact even as Wall Street shifts its attention from earnings toward macro drivers, expecting near-term back-and-forth as the market becomes more two-way.
Source: Investing.com (Economy News)
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