Federal Reserve Chairman Kevin Warsh spent his first Jackson Hole speech doing what a new Fed chair does: setting the tone. And the tone was clearly to the right of where most market participants were sitting.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” Warsh said. He stopped short of committing to a September hike, but he made clear he would not be rushed into one either, dismissing the Fed conventional rationale for patience: “Wage growth has not proven a reliable indicator of future inflation for a very long time.”
The data backs his caution. About half of the items in the Fed preferred inflation basket are rising faster than 3%. Credit spreads sit near the low end of their historical range. Business investment is growing at its fastest pace since 2021. “On balance, I would be hard-pressed to describe broad financial conditions as restrictive,” Warsh said.
The market reaction was a tell. The 2-year Treasury spiked higher on the remarks while the 10-year initially fell before reversing. That is the signature of a hawkish surprise. Warsh also made clear he has no intention of returning to the old playbook of guiding markets: “I stand here today committed to a discipline, not to a decision.” The signal to the three officials who voted to hike last month: the door is open, and it stays open.