Warsh’s Jackson Hole Speech Raises Expectations for September Fed Rate Increase

Inflation threshold

Federal Reserve Chair Kevin Warsh said on August 28 that the central bank may need to tighten policy further if underlying inflation does not move toward its 2% objective “clearly and sufficiently quickly.” In his Jackson Hole speech, delivered on his 100th day as chair, Warsh described the 2% PCE inflation target as “firm” and “fixed” and said the Fed’s immediate focus should be prices.

Warsh did not commit the Federal Open Market Committee to a September increase. He said he was committed to “a discipline, not a decision,” leaving the September 15-16 meeting dependent on incoming data and the views of other FOMC members.

July headline PCE inflation was 3.7% from a year earlier, unchanged from June, according to the Bureau of Economic Analysis. Warsh cited a 4.1% six-month annualized inflation rate and said 54% of PCE components had increased more than 3% over the preceding year. The 3.7% reading is headline PCE inflation rather than core PCE.

Markets price greater chance of action

Reuters reported after the speech that futures put the probability of a September rate increase at about 60%, compared with roughly 40% immediately before Warsh spoke. That estimate is a market-implied probability at a particular time rather than a fixed forecast, and Reuters reporting used pre-speech estimates ranging from roughly 30% to 40% depending on timing and methodology.

Treasury market data recorded a concurrent increase in short-term yields. The Treasury Department’s daily par-yield data show the two-year yield rose to 4.34% on August 28 from 4.20% on August 27. Reuters reported an intraday level near 4.35% after the speech. Higher expected policy rates can raise expected short-term funding costs before the FOMC takes any action.

The speech was one influence on markets during a period when energy prices and Middle East developments also affected yields and inflation expectations. A Reuters market report identified both monetary-policy concerns and geopolitical pressures in cross-market moves, so the full yield change cannot be attributed solely to Warsh’s remarks.

Data and FOMC support remain decisive

The FOMC held its federal-funds target range at 3.50% to 3.75% at its July 28-29 meeting, with a 9-3 vote. Beth Hammack, Neel Kashkari and Lorie Logan dissented in favor of a 25-basis-point increase. The meeting minutes said many participants believed further tightening would probably be necessary if inflation did not decline.

Labor-market data provide a separate input to the September decision. July unemployment stood at 4.1%, while nonfarm payroll employment declined by 23,000, according to the Bureau of Labor Statistics. Warsh characterized the labor market as stable and consistent with full employment.

The August employment report is scheduled for September 4 and August CPI for September 11, both before the FOMC meeting. August PCE data are due September 30, after the meeting. The three July dissents make an increase institutionally plausible, but Warsh cannot determine the outcome alone and supplied no projected path for rates beyond September.