Federal Reserve Chair Kevin Warsh, in his inaugural Jackson Hole appearance, delivered a notably more hawkish message than his July FOMC press conference, flagging inflation as "worrisome" and stating that the Fed's "primary focus should be on prices." He emphasized that if underlying inflation trends fail to return to target at a "sufficient pace," then "there is work to be done."
The immediate market reaction saw the 2-year Treasury yield jump approximately 7 basis points, marking one of the largest market responses to a Jackson Hole speech in recent years. Concurrently, the probability of a September rate hike climbed from around 30% before the speech to above 50%.
Despite this market pricing shift, two of Wall Street's major institutions remain unconvinced. JPMorgan Chase maintains its base case for a December rate hike, with economist Michael Feroli noting that the "more important information" for the September meeting will be the upcoming August nonfarm payrolls and CPI reports. Goldman Sachs forecasts August core CPI and core PCE both rising around 0.2% month-over-month, a trajectory that would likely keep the FOMC on hold.
Inflation as the "Primary Concern": No Substantial Improvement in Underlying Trends
Warsh dedicated a significant portion of his speech to inflation. While acknowledging that this summer's PCE and CPI readings were "better than expected," he quickly pivoted, stating that this "does not tell me that the underlying trend has improved substantially."
He presented data showing that the share of PCE basket items with price increases exceeding 3% over the past 12 months stands at 54%, down from a post-pandemic peak of roughly 77%, yet still well above the 32% average of the two decades before the pandemic. JPMorgan's Feroli noted that this metric is "less opportunistic" than the trimmed-mean PCE Warsh has previously cited, which has normalized, whereas the >3% share remains significantly elevated compared to pre-financial crisis levels. Goldman Sachs pointed out that this calculation partially reflects tariff effects.
Warsh conceded that wage growth is "moderate" but argued that wages have "for a long time not been a reliable indicator of future inflation," implying that moderate wage data does not constitute strong evidence of improving inflation prospects.
Clarifying Two Controversial Stances from July
During the speech, Warsh proactively addressed two statements from the July FOMC press conference that had unsettled markets.
Having previously questioned the future of the 2% inflation target, he now explicitly declared: "There should be no misunderstanding – the Fed's 2% price stability goal, measured by the PCE price index, is a steadfast and fixed target." Similarly, having been ambiguous on policy tools before, he confirmed that "short-term interest rates are the primary tool for achieving the dual mandate." JPMorgan assessed that these two clarifications together send a clear signal – higher inflation will be met with a higher federal funds rate.
Warsh also outlined seven principles guiding policy, reiterated his focus on monetary aggregates, questioned the usefulness of forward guidance during normal times, and concluded by calling for a "quieter, more purposeful Fed in communications." JPMorgan noted this was the longest Fed Chair Jackson Hole speech since 2018.
Economy "Impressive," Financial Conditions "Hardly Tight"
Approximately a quarter of Warsh's speech addressed the economic outlook, delivered in a fairly traditional tone. JPMorgan described this portion as "sounding like a traditional technocratic Fed Chair speech," including discussions of indicators like private domestic final purchases.
Warsh characterized the economy as "impressive, and seems to have strengthened," citing healthy real consumer spending despite shocks and rapidly growing business capital expenditures, with over half of this year's capex growth attributable to AI-related construction. He referenced private domestic final purchases growth running near 3% this year, though Goldman Sachs cautioned that this metric is currently distorted upward by AI-related tech imports.
On the labor market, Warsh viewed it as "fairly stable" and "consistent with full employment," with the unemployment rate "still low by historical standards." His overall assessment was that "it is difficult to describe current broad financial conditions as tight," marking a notable shift from his June press conference stance when he deferred the same question to a working group.
Goldman Sachs and JPMorgan: September Hike Still Not the Base Case
Warsh revealed during the speech that at the July FOMC meeting, "I and most of my colleagues thought it wiser to wait for new information during the intermeeting period before deciding whether adjustments to the policy rate were necessary."
JPMorgan maintains its December hike forecast. Feroli acknowledged that given the increasing number of hawkish signals from Fed officials, acting earlier "would not be unreasonable," but the key variables remain the August employment and CPI data.
Goldman Sachs is more definitive, stating that a September hike would only be possible if August CPI and PPI data come in surprisingly strong. The bank expects August core inflation to rise around 0.2% month-over-month, which would likely keep the FOMC on hold.
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