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Jackson Hole Economic Symposium - Kevin Warsh
Inflation Is Not Getting Better
The Fed's target is 2%. Warsh said inflation is running at 3.7% over the past twelve months, and 4.1% over the past six. That ordering matters. When the recent six-month number is higher than the full-year number, prices have been speeding up lately, not cooling off. It is the opposite of what the market wanted to hear.
He also dismissed the good inflation reports from June and July. Those reports had convinced many investors the Fed was finished. Warsh said they do not tell him anything has actually improved underneath.
His evidence: he broke the inflation basket into its 199 individual pieces, things like rent, groceries, and insurance. Over the past year, 54% of them rose more than 3%. Before the pandemic that number was 32%. More than half of what people buy is still getting expensive quickly. That is a broad problem, not a few odd categories dragging up an average.
The Part He Did Not Say Out Loud
Warsh pointed out that borrowing is still cheap. Companies raise money easily. Banks are lending freely. He said he would be hard pressed to call financial conditions restrictive.
Read that next to a 3.50% to 3.75% interest rate and 3.7% inflation. If rates are not slowing anything down and prices are rising at nearly double the target, rates are too low. He never said the words. He did not need to.
He also removed the usual reason not to raise them. Unemployment sits at 4.1% and has barely moved in two years. Layoff claims are near multi-decade lows. Weak hiring numbers, he argued, reflect fewer people entering the workforce rather than a weakening economy. In his view the job market is healthy and nothing is blocking a hike.
The Avoidant Chairman Explains Himself
The other half of the speech was his case against forward guidance, the practice of telling markets in advance what the Fed intends to do.
His argument: when investors spend their time reading the Fed and the Fed spends its time reading market prices, everyone is looking at a reflection instead of at the economy. Then everyone gets caught off guard at the same moment. He would not even commit to a formula describing how the Fed reacts to data. He said economic knowledge is not precise enough to support one.
He was blunt about who pays when the Fed gets it wrong. Not investors, he said. Households dealing with high prices or shaky jobs. He also placed responsibility for 65 months of elevated inflation squarely on the Fed itself, which sitting Chairmen almost never do.
What Markets Did
Two numbers.
The 2-year Treasury yield rose more than 6 basis points to 4.298%. That yield tracks what investors expect the Fed to do soon. It went up, meaning a rate hike now looks more likely.
The 30-year yield fell 2 basis points to 5.168%. That one reflects long-term inflation fear. It went down, meaning investors got more confident inflation will eventually be brought under control.
Stocks barely reacted. The S&P 500 closed down about 0.2%.
Signal To Watch, Revisited
Those two yields moving in opposite directions was the outcome to hope for. It is what confidence looks like. Markets priced a higher chance the Fed acts, and precisely because of that, a lower chance inflation runs loose.
The risk going in was the reverse. Bank of America warned clients that a big-picture speech with no mention of rate hikes would read as weak and push the 30-year above 5.5%. Warsh gave the big-picture speech and avoided that outcome by making clear the job is unfinished.
What It Means For September
The Fed meets September 15-16. The August jobs report and August inflation report both land first, and they will decide the meeting.
Warsh promised nothing. His closing line was that he is committed to a discipline, not a decision. But everything he described points one direction: inflation accelerating, price increases still broad, borrowing still easy, employment healthy, growth solid. By his own stated test, that is an argument for raising rates.
One last note. The symposium's official theme was payments and financial innovation. Warsh spent his technology section on artificial intelligence and never mentioned stablecoins or crypto once.
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