By Andrew Moran
Contributing Writer
Federal Reserve Chairman Kevin Warsh delivered his inaugural keynote address at the central bank’s annual retreat in Jackson Hole, Wyoming, on Friday.
In his roughly 30-minute prepared remarks, Warsh touched upon a broad array of topics, from above-trend inflation for 65 straight months to the Fed’s new communications direction.
Stock market indexes were mixed after the speech was analyzed, while Treasury yields moved sharply higher.
But traders may have been disappointed, as they did not receive a clear answer on whether the Federal Open Market Committee will raise interest rates or hold steady in September, leaving them to rely on a series of data points to reach a conclusion.
Here are four takeaways from Warsh’s speech.
Inflation Fight
Reiterating his previous public comments, Warsh was adamant that the Fed must restore price stability and bring inflation back to its 2% target.
While summertime headline readings for the Consumer Price Index and the Personal Consumption Expenditures Price Index were better than anticipated, underlying trends were less favorable.
“They do not tell me that underlying trends have meaningfully improved,” Warsh stated. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, our mandate and our charge to keep.”
The central bank chief noted that the Fed is “committed to a discipline, not to a decision.” He referenced core PCE (excluding food and energy) — firmly above 3% — as the key focus for policymakers.
Warsh may have refrained from tying the Fed to a particular direction in the next month, but markets suggest he likely tilted a bit more hawkish in his 3,500-word speech.
Based on the two-year Treasury yield, which generally tracks monetary policy expectations, traders are pricing in higher interest rates. But the near-term outlook suggests traders are split on whether the Fed will pull the trigger on a quarter-point rate hike or stay the course.
“Chairman Warsh seemed to clarify for detractors the overall message, and possibly leaned more hawkish, but there was nothing earth-shattering,” Byron Anderson, head of fixed income at Laffer Tengler Investments, said in an emailed statement.
“Bond markets have normalized and are helping with restrictive conditions, but maybe not enough for the chair. Sounds like the Fed is data-dependent still.”
‘Don’t Call It Forward Guidance’
Forward guidance has “overstayed its welcome,” Warsh declared before an audience of economists, policymakers and Wall Street behemoths.
Changing how the Federal Reserve communicates to the public has been one of the key reforms introduced by President Donald Trump’s pick to replace Jerome Powell.
Fed Chairman Alan Greenspan had slowly introduced the concept of forward guidance in the early 2000s. The idea behind this communications tool is that financial markets will carry out some of the central bank’s policy objectives. His successor, Ben Bernanke, then bolstered its relationship with the public through regular press conferences during the Global Financial Crisis.
But this mechanism has produced a “hall of mirrors” situation, says Warsh.
The rationale is that investors have relied heavily on forward guidance to inform their next trade decisions rather than on real-time economic information. The handholding can also backfire as the Fed looks to markets to interpret data, leading to policy mistakes, he noted.
“A quieter Fed, more purposeful in its communications, is better able to meet its objectives. And we can be held accountable for delivering on our remit — the only true test of our credibility,” Warsh said.
One of the monetary task forces will concentrate on how the Fed “conveys policy deliberations and decisions amid uncertainty.”
Former Bank of England Governor Mervyn King is a member of the group.
Minutes from the July policy meeting revealed that Warsh proposed holding six scheduled meetings per year, held about every two months. This, the meeting summary noted, would allow information to accumulate between meetings and enable greater assessment.
Market Reaction
Over the years, markets have reacted to the Fed Chair’s remarks at Jackson Hole.
In August 2024, U.S. stocks rallied when Powell declared that the “time has come for policy to adjust.” The blue-chip Dow Jones Industrial Average gained almost 500 points, and the tech-heavy Nasdaq Composite Index surged nearly 300 points.
Two years prior, when Powell warned that businesses and households would experience “some pain,” the Dow Jones fell more than 1,000 points, and the Nasdaq lost close to 500 points.
This year, the equities arena hardly reacted to Warsh’s speech. The Dow Jones and the broad-market S&P 500 were little changed. The Nasdaq slipped about 100 points.
“Warsh used the marquee slot exactly as a new chair setting the tone for his tenure should: unambiguously,” Natalia Lojevsky, managing director at CIFC Asset Management, said in an emailed statement.
“The message was that markets, not the Fed, should be doing the forecasting, and investors waiting for a pre-committed reaction function will be waiting through his entire term.”
The Economy Today
The price-stability side of the Fed’s dual mandate is the central bank’s core focus and will drive its decision-making in the near term.
As for the rest of the economy, Warsh is pleased by its resilience.
“For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened,” he said.
While there are strains in some sectors — agriculture and housing, for example — several indicators suggest economic conditions are solid.
The Fed head cited various Wall Street and Main Street data points and surveys to bolster his confidence, including S&P 500 earnings, business capital expenditures, real consumer spending and the labor market.
But fighting inflation and supporting the economy is not an either-or proposition, according to Warsh.
“So much depends on choices we make,” he said. “Sound monetary policy helps households and businesses to prosper. When carried out effectively, it broadens and deepens the momentum of our economy and helps to secure America’s leadership in the world.”
Next week’s jobs report for August will also provide an update on employment conditions.
