Fed Chairman Kevin Warsh talked about hikes on Friday, telling a central bank symposium that they can be both difficult and enjoyable, but urged attendees to think "very carefully" about which one they choose.
Warsh wasn't, of course, talking about interest rates, but rather the "steely death marches" or "leisurely strolls" through the mountains surrounding the posh resort town of Jackson Hole, Wyoming, where he addressed a collection of central banking elite, economists, and other money types.
The central bank's new chief is famously reluctant to provide the "forward guidance" on rates-preferred by his predecessors-that give Wall Street a glimpse into the Fed's thinking on growth, inflation, and the job market.
Instead, he wants investors to do that work on their own-a task that, in turn, provides the Fed with an "unfiltered" view of the very metrics it needs to calibrate rates.
"Providing forecasts to illustrate the Fed's reaction function works better in theory than in practice, better in the lab than in the field," Warsh told his audience. "A quieter Fed, more purposeful in its communications, is better able to meet its objectives."
That's not what the market took away from Warsh's address, his first at the Jackson Hole symposium and undoubtedly his most important remarks so far.
Investors were craving ground rules for September, traditionally the toughest month of the year for stocks. They are exhausted by the economic uncertainty-and rattled by Treasury Secretary's intervention in the bond market.
The federal debt level has soared past $40 trillion, a worrying all-time high, and the deficit is determined to top $2 trillion. The job market is slowing, inflation is sticky, and the Iran war could reignite a surge in global crude prices at virtually any moment.
What the market heard was a Fed chairman worried about inflation, prepared to look at metrics beyond the traditional gauges to get a good reading-and leaning toward a rate hike.
Credit spreads, corporate earnings, money supply, and private sector demand will all get a second look, Warsh said, so the Fed can get a firm grip on the economy, artificial intelligence, and the geopolitical landscape.
"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do."
The market got the message.
The benchmark 2-year Treasury yield, the most sensitive to changes in rate forecasts, jumped 8 basis points to 4.327% after Warsh's address-the highest in more than two years.
And the 10-year yield tested 4.7% while 30-year went modestly lower, at 5.184%, suggesting traders were happier to hear a more details of the Fed's inflation fight.
The odds of a September rate hike popped. So did December bets.
"We are entering a new era of monetary policy, one defined by less signaling, greater emphasis on real-time data, and a willingness to rethink economic first principles as AI reshapes the economy's productive capacity," said Jeffery Roach, chief economist at LPL Financial.
Warsh's "distinctly hawkish speech gave support to the dollar as the chairman appears comfortable keeping policy higher for longer," he added.
So what happens now, with a September Fed meeting less than two weeks away and the market's weakest month set to begin on Tuesday?
There are still a lot of sound fundamentals in place. Second-quarter profits grew by nearly 35%, according to LSEG estimates, with close to 30% growth expected over the year's final two quarters.
Market breadth is expanding, with healthcare, financials, energy, materials, and industrial stocks pacing gains over the past three months, evening out this year's advances away from tech.
Volatility remains muted. The Cboe Group's VIX index was trading at its lowest level of the year and indicating only modest daily swings for the S&P 500 over the next 30 days.
Brock Weimer, of Edward Jones, thinks stocks could see a September pullback, given the history of returns over the soft autumn period and the midterm elections that follow.
Still, Weimer, whose title is investment strategy analyst, is bullish over the longer term.
"Equity markets are navigating well through a seasonally weak period," he said, and "robust profit growth and healthy economic activity continue to provide a supportive fundamental backdrop."
Warsh didn't have to explicitly lay out the case for a September hike, or even provide the market with exactly how the Fed will react to inflation, jobs, and activity data over the weeks ahead.
But what he did have to do was drop hints about how he might calibrate the central bank's next move, even if he stays cagey as to how that will look in real time.
That's probably enough to soothe some of the bond market's jitters, while still allowing investors to focus on the undoubtedly solid mechanics driving stocks.
And while it doesn't remove a host of September risks, from a surge in oil to more tariff disputes to those November midterms, it does make the road a little easier to navigate.
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