Federal Reserve Chair Kevin Warsh said policymakers would need to act if underlying inflation fails to sustainably return to the central bank’s 2% target, signaling a more hawkish stance on inflation than in July. Speaking at the Jackson Hole economic symposium in Wyoming on August 28, Warsh emphasized that the Fed remains focused on ensuring price stability, though he provided limited detail on the specific economic conditions that would trigger a rate hike.
The remarks followed a period of elevated price pressures, with the Personal Consumption Expenditures Price Index rising 3.7% in the 12 months through July. Fed funds futures reflected the shift in tone, with the probability of a September rate hike climbing to 57% from 35% just before Warsh’s speech, according to LSEG data. U.S. Treasury yields also reacted, with the 2-year note reaching 4.34%, its highest level in a month, while the 30-year yield held near 5.19%, close to its highest level in nearly two decades.
Market strategists broadly welcomed the clarity on inflation but noted the absence of explicit guidance on the Fed’s reaction function. Phil Blancato, chief market strategist at Osaic, said Warsh’s comments were clearer than in July but still lacked detail on the combination of inflation and labor market data that would prompt a rate move. Cyrus Amini, chief investment officer at Hyphen Wealth Management, said the speech should ease some bond market anxiety by outlining the Fed’s commitment to lowering inflation toward target.
Chris Gunster, head of fixed income at Fidelis Capital, characterized Warsh’s remarks as more hawkish than expected, while Michael Arone, chief investment strategist at State Street Investment Management, cautioned that the Fed still has room to maneuver and did not signal an imminent rate increase. Karl Schamotta, chief market strategist at Corpay, said Warsh’s comments aimed to address criticism of his prior press conferences by reducing ambiguity around the inflation target and stressing the role of short-term rates in policy transmission.
Sonu Varghese, global macro strategist at Carson Group, noted that Warsh acknowledged the economy was running hot but did not elaborate on how to cool it. The strategist added that the Fed’s reaction function remained unclear, particularly ahead of key data releases. The monthly jobs report is due next Friday, followed by the consumer price index the following week, with investors closely watching for signs that inflation is sustainably easing toward the 2% target.
Equities showed little net reaction, with the S&P 500 down 0.3% on the day.
