Federal Reserve Chairman Kevin Warsh delivered a hawkish message at the Jackson Hole Economic Symposium, suggesting the central bank has "work to do" if inflation doesn't convincingly move towards its 2% target. He stated that the Fed's 2% price-stability objective, measured by the personal consumption expenditures (PCE) price index, is a firm target, and that the responsibility for 65 months of sustained, elevated inflation rests squarely with the central bank. Warsh emphasized that short-term interest rates are the predominant tool to achieve the dual mandate.
Inflation remains a key concern, with the 12-month change in the PCE price index at 3.7% and the six-month change at 4.1%, both significantly above the 2% target. Comparable measures from the consumer price index (CPI) are also elevated. While recent PCE and CPI readings were better than expected, Warsh noted they don't indicate a meaningful improvement in underlying trends. He pointed out that 54% of components in the PCE basket had price increases above 3% over the past year, down from post-pandemic highs but still well above the 32% observed in the two decades before the pandemic.
Despite the inflation concerns, the economy appears resilient. Real consumer spending has increased more than 2% over the past four quarters, and private domestic final purchases (PDFP) has risen by nearly 3% this calendar year. Business capital expenditures, particularly in equipment and intangibles, have shown a 9% growth rate, the highest since 2021, with over half attributed to AI-related buildout. Corporate profits for S&P 500 firms have grown over 20% in the past year, and credit spreads on corporate bonds are near historical lows, with strong issuance volumes.
Warsh's remarks led to a significant market reaction. The policy-sensitive 2-year Treasury 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 55.7%, up about 20 percentage points from the previous day, according to the CME Group's FedWatch tool. Analysts, like those at Capital Economics, viewed Warsh's speech as "far clearer – and hawkish," opening the door for a hike earlier than their previous forecast of December. However, Warsh did not provide a timeline for rate hikes, stating his remarks should not be taken as "forward guidance."
Former Philadelphia Fed President Patrick Harker commented on the prolonged period of above-target inflation, stating, "You can't keep saying this is our job' and then not act." He added, "As the old saying goes, actions speak way louder than words." Warsh, along with a majority of FOMC colleagues, had agreed in July to await more information before deciding on an interest rate policy change, especially given potential developments in supply chains, investment flows, and geopolitics. However, his recent statements suggest a shift towards more decisive action if inflation persists.
