Kevin Warsh did not announce a September hike. He made one much easier to price. In his first Jackson Hole keynote as Federal Reserve chair on Friday, he said the 2% PCE target is fixed, that financial conditions are not restrictive, and that the Fed would still have "work to do" if officials cannot be confident that underlying inflation is returning to target at an appropriate pace. He also said forward guidance had "overstayed its welcome" and that the central bank should not tell markets their next trade. CME FedWatch lifted the odds of a quarter-point move at the 15-16 September meeting from about 35% on Thursday to as high as 61% after the speech, with most prints clustering in the mid-50s.
The two-year Treasury yield, the note that tracks the policy path, jumped as much as 12 basis points to about 4.35%. The dollar index firmed. A Bank of America survey had shown 69% of fund managers expecting a neutral message. They did not get one. For the setup going into the podium, see our Friday preview.
The 54% test
Warsh's inflation argument was about breadth, not a single print. He said 54% of the 199 PCE components have risen faster than 3% over 12 months, and 49% ran above 3% at an annualized rate over six months. Six-month annualized headline inflation, in his telling, is 4.1%. Headline PCE is 3.7% on the year. Unemployment is 4.1%, business investment is up 9%, corporate profits more than 20%. Labour markets, he said, look consistent with full employment. That combination is why he wants the committee focused on prices, not on a pre-announced path.
The political bind into 15 September
A hike before the midterms would put Warsh, whom President Trump picked, immediately at odds with an administration that has pressed for lower rates. A hold after this speech would require him to explain how doing nothing matches the intolerance for elevated inflation he just put on the record. Former Fed vice-chair Donald Kohn said a soft CPI on 11 September would give Warsh cover to stand still. Another month of sticky data would not. Crypto, gold, and equities already took the first mark: Bitcoin slipped below $78,000 and bullion sold off more than 3%. The next prints, not the next speech, decide whether 55% stays the base case.