Warsh's Hawkish Jackson Hole Speech Leaves September Open

Fed Chair Kevin Warsh stopped short of signaling a September rate hike at Jackson Hole on Friday. His assessment of the economy left little comfort for doves. Warsh said the Fed's 2% PCE inflation objective is a "firm, fixed target" and stressed that price stability is "not self-executing." With the labor market still at full employment and inflation running well above target, his conclusion was direct: "The Fed's predominant focus right now should be on prices."

Warsh also questioned whether the current 3.50-3.75% policy rate is imposing much restraint. He pointed to rapid capital spending, strong corporate profits, tight credit spreads, healthy issuance, and relatively easy bank lending standards. "I would be hard pressed to describe broad financial conditions as restrictive," he said. The labor market offered little counterweight. Unemployment stands at 4.1%, jobless claims are near multi-decade lows on a four-week average, and employment conditions are, in his assessment, "consistent with full employment."

The inflation discussion was equally hawkish. Warsh acknowledged that summer CPI and PCE readings had been better than expected. He said they "do not tell me that underlying trends have meaningfully improved." More than half of PCE components rose faster than 3% over the past year, while six-month breadth remained elevated. His policy standard was demanding: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Medium-term inflation expectations remain anchored, Warsh said. He warned that such expectations "tend to look strong and durable until they don't."

What markets did not get was timing. Warsh used the speech to reject routine forward guidance. Quasi-commitments on rates can "inhibit our own freedom to make the right calls," he said. His closing line captured the deliberate ambiguity: "I stand here today committed to a discipline, not to a decision."

September remains open rather than endorsed. Warsh said inflation is too high, the economy is strong, financial conditions are not restrictive, and recent disinflation has not been sufficient. That combination, he indicated, keeps a rate hike in play. The next Federal Open Market Committee meeting is scheduled for September 19-20.