Fed Chair Kevin Warsh Says Policymakers Have ‘Work to Do’ in Clearest Hints Yet at Short-Term Rate Hikes

Federal Reserve Chair Kevin Warsh delivered his first Jackson Hole keynote address earlier today, sending the clearest signal yet that interest rate hikes may be necessary to combat persistent inflation. 

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

And according to the chairman, “while this summer’s readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”

Putting Today’s Jackson Hole Speech in Context

The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, remains at 3.7% on an annual basis — well above the 2% target that has been missed for over five years. Warsh noted that 54% of goods and services in the PCE basket are still rising at annual rates above 3%, compared to roughly 32% in the two decades before the pandemic.

The speech marked a significant departure from Warsh's previously reticent posture on the economic outlook since taking office on May 22. Critically, Warsh clarified that short-term interest rates are the "predominant tool" for achieving the Fed's dual mandate, addressing confusion from his July press conference. 

He assessed that current financial conditions are not restrictive, pointing to robust business investment in AI infrastructure, strong corporate earnings, healthy consumer spending, and a labor market consistent with full employment at 4.1% unemployment. 

These observations implicitly suggest the current federal funds rate of 3.5%-3.75% may not be sufficiently restraining the economy to bring inflation down.

Expectations Spike for a September Rate Hike

Financial markets reacted immediately and decisively to the hawkish tone. The 2-year Treasury yield surged to 4.327%, its highest level in a month, and the U.S. Dollar Index ($DXY) rose 0.4%. 

The probability of a rate hike at the September 15-16 FOMC meeting jumped from 35% to as high as 59.5%, according to the CME FedWatch tool, and the probability of rates remaining unchanged through year-end plummeted from roughly 26% to under 12%.

Despite the hawkish economic assessment, Warsh maintained his opposition to providing forward guidance, calling the practice something that "has overstayed its welcome" and arguing it limits the Fed's flexibility. 

He stated he is “committed to a discipline, not to a decision,” and explicitly said his remarks should not be interpreted as forward guidance or a formal reaction function. 

A September Rate Hike Isn’t Guaranteed

Economists don’t necessarily agree with fed funds futures traders. Heather Long, chief economist at Navy Federal Credit Union, says that “A hike probably won’t come in September, but it will by October or December.” 

However, Warsh’s speech has placed every upcoming meeting firmly in play pending incoming data on employment and inflation – and some analysts have also noted that Secretary Bessent’s QE on the long end could tie Warsh’s hands on the short end. 

During last Friday’s “Market on Close” livestream, Senior Market Strategist John Rowland, CMT, was even more blunt, saying that the Treasury’s recent bond market intervention was like putting a “Band-Aid on a fatal wound.” 

For a closer look at the bond market mechanics happening now, here’s the clip:

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