No Fed relief at Jackson Hole: Warsh keeps rate-hike door open

Federal Reserve Chair Kevin Warsh gave advisors little reason to expect rate relief this week, telling the Jackson Hole Economic Policy Symposium that elevated inflation could still force the Fed's hand on further hikes — a stance that pushed the market-implied odds of a September increase above 55%, according to the CME's FedWatch tool.

Warsh, making his first appearance at Jackson Hole since assuming the Fed hotseat, indicated that elevated inflation levels could result in interest rate hikes.

“We must be confident that underlying inflation is moving to our objective, clearly, and at sufficient speed,” he said. “Otherwise, we have work to do - that's our job, that’s our mandate, and that’s our charge to keep.”

Inflation data released earlier this week gave Warsh an unwelcome number to carry into the Jackson Hole keynote. PCE, which is the Federal Reserve’s preferred gauge of inflation, rose 3.7% year-over-year in July, holding steady after an annual increase of 3.7% in June, according to the Bureau of Economic Analysis.

The Consumer Price Index also points to the elevated inflationary environment. July’s CPI was 3.4% over the last 12 months, although this was down slightly from 3.5% in June, which saw CPI hit its highest level in three years.

During his keynote, the Fed Chair said that, while this summer’s PCE and CPI readings were better than expected, they do not tell him that underlying trends have “meaningfully improved.”

Warsh’s comments were not exactly out of the blue. Minutes from the Federal Open Market Committee's July meeting, released last week, show a contingent of officials ready to push rates higher if inflation doesn't retreat toward the Fed's 2% target. 

The Fed chair addressed this target during his keynote. “There should be no misunderstanding – the Fed’s price stability objective of 2%, as measured by the PCE price index, is a firm, fixed target,” he said.

However, Warsh also maintained his stance of not providing forward guidance, something that he stressed during his speech. “Forward guidance as a regular practice was adopted by my colleagues and me during the global financial crisis – it was essential at the time and we introduced it with much fanfare,” he said. “But as with other legacies of crises past, I believe the practice has outstayed its welcome.”

“Oversharing policy deliberations and overcommitting to future decisions to can lead markets, businesses, and households astray,” he added.

On Wednesday morning, the CME’s FedWatch tool puts the probability of rates being unchanged at 44.5% for September’s Fed meeting. A hike to between 3.75% and 4% has a likelihood of 55.5%, according to the tool, which updates in real time. The likelihood of a rate hike has risen from earlier this week.

Warsh’s comments underline that the inflation fight is not over, according to Jeffrey Roach, chief economist for LPL Financial. “Warsh repeatedly emphasized that underlying inflation remains too high and that progress toward 2% has been slower than many expected,” he said, in a statement.

Luis Alvarado, co-head of Global Fixed Income Strategy at Wells Fargo Investment, echoed this sentiment. “Chair Warsh remains committed to bringing inflation under control,” he said, in a statement. “According to his remarks, overall conditions are far from restrictive and if the inflation price target does not move to 2%, then the Fed has work to do.”