Federal Reserve Chairman Kevin Warsh stated that the U.S. central bank will "have work to do" if policymakers are not confident that inflation is heading down to 2%. This marks a significant shift from his previous vague promises regarding price stability, moving closer to acknowledging that interest rate hikes may be necessary to curb price pressures. His remarks, made at the Jackson Hole symposium, drew applause from global central bankers and led markets to increase bets on a rate hike as early as next month.
Warsh noted that progress on inflation over the past two years has been modest, with the Fed's preferred Personal Consumption Expenditures (PCE) Price Index remaining at 3.7% on an annual basis as of July, significantly above the 2% target. He emphasized that the Fed's inflation target is "firm" and "fixed" and that it is the Fed's job to ensure inflation expectations do not become unanchored. Analysts at Capital Economics described Warsh's speech as delivering a "far clearer — and hawkish — message," opening the door to an earlier rate hike than their previous December forecast if future price data remains firm.
Following Warsh's speech, rate futures began pricing in about a 60% chance of a rate hike next month, up from approximately 40% before his remarks. According to CME data, the probability for a September rate hike, as measured by the FedWatch tool, increased to 55.7%, up roughly 20 percentage points from the previous day. The policy-sensitive 2-year Treasury note also soared nearly 8 basis points, or 0.08 percentage point, to 4.31%, its highest since late July, reflecting increased expectations for short-term rate increases. Warsh also pointed out that current market interest rates and the Fed's unchanged short-term policy rate (in the 3.50%-3.75% range since December) suggest that "credit and loan markets are showing few signs of policy restraint," laying the groundwork for arguments in favor of a rate hike if inflation persists.
