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Warsh flags possible hikes
Federal Reserve Chair Kevin Warsh signaled on August 28 at the Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming, that the central bank could raise interest rates again if inflation does not move convincingly back toward its 2% target.
“Warsh made the remarks on August 28 during the Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming.”
Warsh said, “We need to be confident that underlying inflation is moving toward our target clearly and at a sufficient pace,” and indicated that otherwise the Federal Reserve may have to take additional action.
The Fed chair pointed to inflation that remains well above target, with the personal consumption expenditures price index rising 3.7% over the past 12 months and inflation at an annualized rate of approximately 4.1% over the latest six-month period.
Warsh also said the Federal Reserve examined 199 individual components of the PCE index and that over the past year, prices rose by more than 3% for approximately 54% of goods and services included in the index.
He added that the Federal Reserve’s benchmark interest rate has remained within the 3.50%-3.75% range since December, while market expectations for a rate increase at the Fed’s September 15-16 meeting reportedly climbed to around 55% from approximately 40% before the speech.
No forward guidance
Warsh told the Fed’s Jackson Hole audience that the central bank must be confident inflation is moving to its objective, saying, “Otherwise, we have work to do,” while also emphasizing that short-term interest rates are the predominant tool to achieve the dual mandate.
In remarks prepared for delivery, Warsh said, “short-term interest rates are the predominant tool to achieve the dual mandate,” and he also argued that the Fed should be more restrained in signaling its future decisions.
He questioned the extensive use of forward guidance, saying excessive dependence can create a situation where markets primarily react to the central bank while the central bank relies on market indicators shaped by its own communications.
AP reported that Warsh did not imply a rate hike is imminent, but he appeared to dismiss perceptions that inflation is no longer a threat, pointing to data showing inflation remains stubbornly above the central bank’s 2% target.
AP also said Warsh replaced Jerome Powell in late May after his predecessor’s term ended, and noted that the yield on the two-year Treasury moved from 4.22% to 4.30% after the speech.
Markets price the next move
After Warsh’s Jackson Hole remarks, markets interpreted the comments as a signal that the Federal Reserve could return to monetary tightening, with rate futures pricing around a 55% chance of a rate hike at the Fed’s September 15-16 meeting.
“After his speech, that likelihood rose above 50/50.”
NPR reported that before Warsh spoke, investors put the odds of a September rate hike at about one in three, and after his speech that likelihood rose above 50/50.
The Hill reported that the FOMC voted 9-3 to keep interest rates steady at a range of 3.5 percent to 3.75 percent, marking the fifth straight meeting at which the panel held rates.
The Hill also said CME’s FedWatch tool forecast quickly switched Friday morning, with the chance of an interest rate increase rising from 34 percent on Thursday to 57 percent following Warsh’s speech.
In the bond market, AP said the yield on the two-year Treasury moved from 4.22% to 4.30% after the speech, while it noted that longer-term yields on 10-year and 30-year Treasuries were mostly flat.