Fed Chairman Warsh wants a quieter Fed and warns of inflation

Federal Reserve Chair Kevin Warsh delivered a clear message at the annual Jackson Hole symposium: inflation is not improving enough and markets must become less dependent on signals from the central bank. Warsh avoided concrete statements about the direction of interest rates, but did leave the door open to a rate hike if price increases do not decline quickly enough. His speech stood out for what he deliberately did not say.

In brief:

• Warsh says recent inflation figures are better than expected, but are not evidence of structural improvement.
• He advocates for a ‘quieter Fed’ that places less emphasis on forward-looking signals to markets.
• After the speech, the odds of a rate hike in September rose to more than 55%.

Inflation not yet structurally improved

Warsh acknowledged that the most recent PCE and CPI figures were better than expected, but said he drew few conclusions from them. “These summer figures do not tell me that the underlying trends have meaningfully improved,” Warsh said. He added that the Fed must be certain that inflation is moving toward the 2% target quickly enough. “Otherwise, we still have work to do.”

As CNBC reports, bond markets reacted immediately to his words. The yield on two-year government bonds rose nearly 8 basis points to 4.31%, the highest level since late July. Traders raised the probability of a rate hike in September to 55.7%, an increase of about 20 percentage points compared with a day earlier.

“Warsh has opened the door to a rate hike. Probably not in September, but possibly in October or December,” said Heather Long, chief economist at Navy Federal Credit Union.

Less guidance, more restraint

The tone of the speech differed sharply from that of his predecessors. Whereas former Chair Jerome Powell gave clear hints about rate cuts at Jackson Hole last year, triggering a significant rally on Wall Street, Warsh avoided any concrete indication of future policy. He said he was acting from discipline, not from a predetermined decision.

Warsh has long advocated for a ‘quieter Fed’, a central bank that relies less on so-called forward guidance, the practice of providing forward-looking signals about interest rate policy. “Markets should not primarily look to the Fed for their next decision,” he said. He is now 100 days into his term and has established five working groups to review different parts of Fed policy.

Despite his concerns about inflation, Warsh sounded optimistic about the broader economy. He pointed to the positive effects of artificial intelligence, solid consumer and business spending, and a labour market he described as flattening in supply but not deteriorating. Equity markets closed higher after the speech, while investors are closely watching developments around central banks worldwide.