- Fed Chair Kevin Warsh warned that recent inflation data has not shown enough meaningful improvement, leaving the door open to higher interest rates.
- Traders raised the probability of a September rate hike to 55.7% following his Jackson Hole speech.
- The 2-year Treasury yield jumped nearly 8 basis points to 4.31% as markets reacted to the possibility of tighter monetary policy.
Federal Reserve Chair Kevin Warsh has opened the door to additional interest rate hikes after warning that inflation remains too high despite better-than-expected readings this summer.
Speaking Friday at the Fed’s annual Jackson Hole symposium, Warsh avoided giving explicit guidance on the central bank’s next policy move. However, his comments suggested policymakers could tighten monetary policy further if inflation fails to move convincingly toward the Fed’s 2% target.
“While this summer’s inflation readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh said.
He added that the Fed needs confidence inflation is moving toward its target “clearly and at sufficient speed,” warning that otherwise policymakers still have work to do.
Rate Hike Odds Jump After Warsh Speech
Markets quickly adjusted expectations following Warsh’s remarks.
Traders increased the probability of a rate hike at the Fed’s September meeting to 55.7%, according to CME FedWatch. That represents an increase of roughly 20 percentage points from the previous day.
Treasury yields also moved sharply higher. The policy-sensitive 2-year Treasury yield climbed nearly 8 basis points to 4.31%, its highest level since late July.
Stocks, however, moved higher after investors digested the speech.
Navy Federal Credit Union Chief Economist Heather Long said Warsh had opened the door to another rate hike, although she suggested a move could potentially come in October or December rather than September.
Warsh Remains Confident in the Economy
Despite his concerns about inflation, Warsh offered a relatively positive assessment of the broader U.S. economy, saying it “appears to have strengthened.”
He pointed to resilient consumer and business spending while again highlighting the potential economic benefits of artificial intelligence.
Warsh also acknowledged slower hiring but attributed some of the weakness to a flattening labor supply rather than a significant deterioration in economic conditions.
The combination of persistent inflation and continued economic strength could give the Fed additional room to keep monetary policy restrictive or raise rates further if necessary.
Warsh Wants a Quieter Federal Reserve
Warsh also used Jackson Hole to explain his broader approach to central bank communication.
Rather than providing markets with detailed forward guidance about future interest rates, he wants investors to focus more heavily on economic data.
“I stand here today committed to a discipline, not to a decision,” Warsh said.
He argued that forward guidance has “overstayed its welcome” and called for a “quieter Fed, more purposeful in its communications.”
Warsh also declined to establish a fixed reaction function specifying exactly what economic conditions would trigger rate changes. He argued that economic relationships change over time, particularly as geopolitics, technology and global supply chains evolve.
For markets, that could mean less certainty about the Fed’s next move. With September rate-hike expectations rising above 50%, upcoming inflation and economic data could now play an even larger role in determining whether policymakers tighten monetary policy again.
