Warsh Gives the Market Plenty to Chew On
The Fed Chair gave no formal forward guidance, but inflation remains the focus and rate hike probabilities have shifted.
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Fed Chair Kevin Warsh completed his speech at the Jackson Hole Economic Policy Symposium and, based on the changing probabilities in the CME FedWatch Tool, the market is viewing his comments as skewing more hawkish than dovish.
The probability for a September rate hike climbed to ~55% from 35% Thursday, and that means the market is now expecting the Fed to pull the trigger on a hike. The probabilities tied to the October and December Fed policy meetings point to one rate hike expected between now and the end of 2026. As of now that looks to be at the Fed’s September policy meeting.
The probability for a September rate hike climbed to ~55% from 35% yesterday, and that means the market is now expecting the Fed to pull the trigger on a rate hike.
Heading into Warsh’s comments, our thinking was that he was not likely to tip his hand or the Fed’s on monetary policy. While he didn’t do that he did share a few things that bring some clarity to his areas of focus, and how we should read incoming data:
Warsh reviewed a number of economic data points, and while he acknowledged some stress in the housing and agricultural markets, he sees the economy as doing well and the labor market stable. In Warsh’s own words, this means the Fed’s focus is on inflation. That’s not the biggest reveal given data collected of late, but it’s still good to hear that confirmation. Warsh also commented that against those economic musings, the economy is not feeling all that restrained by current policy.
The Fed is committed to 2% inflation with the PCE Price Index the metric it will focus on. Warsh called out the year-over-year July PCE Price index reading of 3.7%, noting on a trailing six-month basis that metric was above 4%. Our take on this is it confirms the metric the Fed will use to gauge progress, removing some of the concern over some arcane formula that may have been introduced. We will continue to assess inflation data across a variety of sources, but keep a watchful eye on PCE data.
In reviewing those figures, Warsh commented the data are not showing improvement on underlying inflation, which he said is where the Fed will have its focus. This tells us that if incoming data point to inflation being sticky at that 3.7% PCE price index level or poised to climb higher, the odds of a rate hike are going to rise as well.
Warsh also indicated the Fed funds rate is the main policy tool to address inflation. Again, not a big revelation but still good to confirm.
What Are We Going to Do?
Following Warsh’s Jackson Hole speech we will continue to follow the data and update our thinking as needed. But based on what we’ve seen thus far, our view is we are likely to get a September rate hike unless we see a significant step down in inflation data between now and September 16, which is when the Fed delivers its next policy decision.
With the Flash August PMI and July PCE Price Index data in hand, the next set of reports we’ll be watching are the following:
September 1 – S&P Global Final Manufacturing PMI (August), ISM Manufacturing PMI (August), JOLTS Job Openings & Quits (July)
September 2 – ADP Employment Change Report (August)
September 3 – S&P Global Final Services PMI (August), ISM Services PMI (August),
September 4 – Employment Report (August)
September 8 – Consumer Inflation Expectations (July)
September 10 – Producer Price Index (July)
September 11 – Consumer Price Index (July)
September 16 – Fed Policy Decision.
Note: With the Portfolio’s August Monthly Roundup being published on Monday, August 31, we will not be published a Weekly Roundup later today.
