Federal Reserve Chair Kevin Warsh used his first Jackson Hole address to push back against market expectations for imminent easing, signaling that the central bank could still raise rates if inflation does not cool sufficiently. According to the CME FedWatch tool, the probability of a September hike to a range of 3.75% to 4% now stands at 55.5%, up from earlier in the week, while the odds of holding rates steady have fallen to 44.5%.
In his keynote at the Kansas City Fed's annual symposium, Warsh emphasized that the Fed's 2% inflation target, as measured by the personal consumption expenditures (PCE) price index, is non-negotiable. "There should be no misunderstanding – the Fed's price stability objective of 2% is a firm, fixed target," he said. He added that while recent inflation readings have been better than expected, they do not indicate that underlying trends have "meaningfully improved."
The latest data gave Warsh little comfort. The Bureau of Economic Analysis reported that July PCE inflation held steady at 3.7% year-over-year, matching June's annual increase. This follows a flat July PPI reading that suggested persistent price pressures in the pipeline.
Warsh's hawkish tone was not entirely unexpected. Minutes from the Federal Open Market Committee's July meeting, released last week, revealed a contingent of officials ready to push rates higher if inflation does not retreat toward the 2% target. The chair's remarks reinforce that view, underscoring that the fight against inflation is far from over.
Notably, Warsh reiterated his aversion to forward guidance, a tool he helped popularize during the global financial crisis. "Forward guidance as a regular practice was adopted by my colleagues and me during the global financial crisis – it was essential at the time," he said. "But as with other legacies of crises past, I believe the practice has outstayed its welcome." He warned that "oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray."
Market participants took the message to heart. Jeffrey Roach, chief economist at LPL Financial, noted that "Warsh repeatedly emphasized that underlying inflation remains too high and that progress toward 2% has been slower than many expected." Similarly, Luis Alvarado, co-head of Global Fixed Income Strategy at Wells Fargo Investment, said the chair "remains committed to bringing inflation under control," adding that "overall conditions are far from restrictive."
For financial advisors, the implications are significant. The elevated odds of a September hike suggest that fixed-income portfolios may face continued headwinds, while equity valuations could be tested if the Fed maintains its restrictive stance. The pivotal week for markets has already seen volatility, and Warsh's comments add another layer of uncertainty.
Looking ahead, the Fed's next policy meeting is scheduled for September 19-20. With inflation running well above target and the labor market still resilient, Warsh's message is clear: the central bank will not hesitate to act if needed. As he put it, "We must be confident that underlying inflation is moving to our objective, clearly, and at sufficient speed. Otherwise, we have work to do."
