Federal Reserve Chair Kevin Warsh delivered a more hawkish message at the Jackson Hole economic symposium, indicating the central bank "will have work to do" if inflation doesn't move towards its 2% target "clearly and at sufficient speed." This marks a clearer acknowledgment that interest rate hikes may be necessary to curb persistent price pressures, a departure from his previous vague promises regarding price stability. Warsh noted that the Fed's preferred Personal Consumption Expenditures Price Index remained at 3.7% annually as of July, and that recent data "do not tell me that underlying trends have meaningfully improved," with about half of the PCE basket increasing at over a 3% annual rate.
Warsh emphasized that the Fed's predominant focus should be on prices, citing a stable labor market, resilient economic growth, robust business investment, and financial conditions that show few signs of policy restraint. He also stated that short-term interest rates are the predominant tool to achieve the dual mandate. While he did not provide explicit forward guidance or a timeline for rate hikes, his remarks led to a significant shift in market expectations.
Following Warsh's speech, stock market indexes climbed, while Treasury yields moved higher. The policy-sensitive 2-year note soared nearly 8 basis points to 4.31%, its highest since late July. Traders increased the probability of a rate hike at the September policy meeting to approximately 55.7% from about 34% prior to the speech, according to CME Group's FedWatch tool. Analysts at Capital Economics characterized Warsh's speech as "far clearer - and hawkish - message" that leaves the door open to an earlier rate hike than previously expected, possibly before December.
