The weather might have been cloudy on Friday in Jackson Hole, Wyo., but Federal Reserve Chairman Kevin Warsh's keynote speech at the 2026 Jackson Hole Economic Policy Symposium was clear. Warsh offered his most straightforward indication yet that the central bank stands ready to intervene to lower inflation.
Call it oblique forward guidance. Although Warsh doubled down on his oft-stated view that the Fed should abandon "early pronouncements of future policy decisions," there was no mistaking his insistence that policymakers are prepared to act to bring inflation back down to the Fed's 2% annual target.
The speech, delivered on Friday morning, was a "significant milestone" and a "game changer" compared with the chairman's previous remarks, Torsten Sløk, chief economist at Apollo Global Management, told Barron's. "It was certainly a major step away from the press conference in July and clarified the most important things," Sløk added.
Warsh confounded both the press and the markets in a July news conference by refusing to share his economic views or his framework for contemplating changes in monetary policy.
Markets saw the Jackson Hole speech as a signal that the Fed may raise interest rates in September to curb price growth. Futures-market traders put the odds of a quarter-percentage-point rate hike in September at 58% after the speech, up from 35% on Thursday. The current federal-funds-rate target range is 3.50%-3.75%.
Two-year Treasury yields moved sharply higher in response to Warsh's comments, and the dollar rose in value, an indication that the speech improved the Fed's credibility, Sløk said.
In the speech, Warsh reaffirmed the Fed's commitment to achieving 2% inflation, stating that the personal consumption expenditures price index remains its benchmark inflation measure. "The Fed's price-stability objective of 2%, as measured by the personal consumption expenditures [PCE] price index, is a firm, fixed target," he said.
Warsh called recent trends in PCE "concerning," noting a 12-month change of 3.7% in the July PCE price index. But he also provided more clarity around the metrics he uses to evaluate the health of the economy. In addition, he shared his view that the U.S. economy currently is on strong footing, citing favorable statistics on labor, investment, and other measures. His comments were the closest thing to a framework or scenario guidance that he has provided publicly since becoming Fed chairman in May.
Warsh emphasized that the latest PCE and consumer-price-index readings, though well below postpandemic levels, weren't low enough to prove that inflation is on a sustainable path back to 2%. "While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved," he said.
His comments about inflation echoed those of Cleveland Fed President Beth Hammack, one of the more hawkish members of the Federal Open Market Committee, and one of three officials who dissented at the Fed's July policy meeting in favor of raising rates.
Although inflation has remained above the Fed's 2% target for 65 months, a "good majority" of FOMC members believed that it was "wiser" to wait for the July and August economic data before deciding whether to adjust rates, Warsh said. "And, we expressed our joint readiness to act as circumstances might require," he added.
Investors got more details on how Warsh thinks about inflation. He explained in the speech that he disaggregates the 199 individual components of the PCE index to help him gauge underlying inflation trends, and that 58% of goods and services saw price increases above 3% in the past 12 months. While fewer, or 49%, showed similar increases over the past six months, Warsh called inflation "still quite elevated."
He also said the recent rise in overall commodity prices "bears watching."
"Essentially, Warsh creates a diffusion index of the many components of inflation," said Adam Posen, president of the Peterson Institute for International Economics. "That's not a framework; that's not a reaction. But I think it will be enough for the market."
Warsh dismissed wage growth as a reliable indicator of future inflation growth, countering a view that some other Fed officials have stressed in the past.
Friday's speech made clear that the Fed chairman is more interested in analyzing and prioritizing forward-looking economic indicators than backward-looking data. "The first principle he listed to guide his thinking on policy is to 'interrogate reality,' which he described as ensuring that the data on which the Fed acts [are] maximally up-to-date and relevant," said Toomas Laarits, an economics professor at New York University's Stern School of Business "I believe these comments foreshadow an emphasis on the details of the underlying data."
The Fed will have more inflation and jobs data to ponder ahead of the Sept. 15-16 FOMC meeting, including the August CPI reading and employment report. A failure to hike rates in the absence of dramatic declines in either inflation or payroll growth could threaten its freshly won credibility.
"We fear Chair Warsh has backed himself into a corner where not hiking in September would drive a more significant loss in credibility, absent a material improvement in the data" said George Curtis, a portfolio manager at TwentyFour Asset Management.
That said, Warsh's emphasis in the speech on rising capital expenditures, healthy consumer spending, and expectations for robust earnings growth could act as a bulwark against any additional sign of weaker labor conditions.
Like the Grand Tetons that tower over Jackson Hole, the September FOMC meeting will soon loom large for markets, offering Warsh his next big test. If he passes it, investors will reaffirm their confidence in the Fed. And if he doesn't, he will need a compelling excuse.
Comments