Warsh Passes Jackson Hole with Ease, but the Real Challenge is Just Beginning

Last Friday's speech at Jackson Hole proved that Warsh is able to "talk the talk" on inflation. However, whether he can truly "walk the walk" will be answered at the September FOMC meeting and subsequent policy actions.

Federal Reserve Chairman Kevin Warsh's speech at the Jackson Hole annual meeting last Friday temporarily eased market concerns about his policy stance. Rate traders quickly raised their expectations for a rate hike in September, and economists from Barclays, Société Générale, and Deutsche Bank have included rate hikes in their forecasts for September and December.

However, this "passing" is more about the market's relief at Warsh reaffirming his anti-inflation stance rather than a renewed recognition of his policy credibility. Jamie McGeever, a columnist for Reuters, recently wrote that the real challenge Warsh faces is how to prove through subsequent actions that this statement is not just a one-time policy adjustment.

While attending the central bank conference hosted by the Kansas City Fed in Jackson Hole, Wyoming, Warsh clearly stated his commitment to achieving the Fed's 2% inflation target. He emphasized that the policy rate is the best tool for the Fed to achieve this goal and that he is willing to use this tool if economic conditions require it.

This statement directly changed market pricing. The probability of a rate hike in September rose from about one-third before the speech to about two-thirds, with economists from Barclays, Société Générale, and Deutsche Bank subsequently predicting that the Fed would raise rates in September and December.

The issue is that Warsh's speech is seen as hawkish partly because his previous public statements left too many questions, especially the poor response to the press conference following the July Fed policy meeting.

Gregory Daco, chief economist at EY-Parthenon, pointed out that it took Warsh 100 days to clearly articulate his commitment to the Fed's 2% inflation target and his willingness to defend it. For the Fed chairman, this should be a basic stance, especially given that the labor market is, in Warsh's own words, already "consistent with full employment."

September Meeting: Warsh Faces a Test Soon

With only two weeks until the next Federal Open Market Committee (FOMC) meeting, Warsh needs to face not whether his speech can stabilize the market, but whether policy actions can align with his speech.

The three officials who voted in favor of a rate hike at the July meeting—Cleveland Fed President Mester, Dallas Fed President Logan, and Minneapolis Fed President Kashkari—are not isolated hawkish voices.

The minutes from that meeting indicated that "several" participants supported a 25 basis point rate hike, and "many" participants believed that further tightening may be needed to bring inflation back to target levels.

Chicago Fed President Goolsbee and Kansas City Fed President George both emphasized last week in Jackson Hole that controlling inflation should be the central bank's top priority.

Boston Fed President Collins also stated earlier last week that the Fed may need to raise rates soon.

Fed Governor Barr said on Tuesday that he would be prepared to support a rate hike if inflation does not ease. He expressed concern that inflation has stubbornly remained above the Fed's 2% target for nearly five and a half years, fearing that "broader price pressures are taking root." "If inflation does not appear to be sufficiently easing, then I believe we should decisively raise rates."

As a result, Warsh's position is closer to the middle ground that is forming within the FOMC, rather than an isolated hawkish stance.

Going forward, economic data will become an important basis for determining September's policy. If the Fed's decisions are entirely data-driven, the August non-farm payroll report to be released this Friday, along with the August CPI and PPI inflation data to be released next week, will be the focus of market attention.

McGeever wrote that unless these three data points show unexpected weakness, the obstacles to a rate hike in September will be relatively limited. Warsh himself also reminded that the Fed should observe economic trends rather than be swayed by "isolated data points."

He also acknowledged that core inflation has not shown "meaningful improvement" in recent months. If the rate market continues to strengthen expectations for a rate hike before the meeting, Warsh will have little reason to guide the FOMC to remain inactive.

Economists at Bank of America warned, "Otherwise, he risks undermining some of the credibility he has painstakingly built up since last Friday."

Trump's Rate Cut Demands Still Pressuring from the Sidelines

There remains significant uncertainty about how Warsh will vote in September, with one unavoidable question being the political pressure from the White House.

Warsh has repeatedly stated that his policy decisions will not be influenced by the White House, but the market still finds it difficult to completely eliminate doubts. Trump has previously publicly and vocally pressured Warsh's predecessor Powell, which has kept investors concerned about the Fed's independence.

Trump reiterated his long-held position on Monday that the Fed should cut rates. However, he also stated that he has a great "respect" for Warsh and believes Warsh will "do what he has to do."

The contradiction between political pressure and economic reality is not simple. According to a poll released by Reuters/Ipsos on Monday, Trump's approval rating has dropped to its lowest level in his political career; ahead of the midterm elections on November 3, "cost of living" is the issue voters are most concerned about, clearly leading other topics.

Trump clearly does not want to see rates rise further, but persistently high inflation and rising long-term borrowing costs will also increase the pressure on the U.S. economy and households.

Since taking over from Powell at the end of May, Warsh has reached a point where he must prove the credibility of his policies in just about three months. Especially with long-term bond yields continuing to rise, he needs to rebuild not just market confidence in a single speech.

Last Friday's speech at Jackson Hole proved that Warsh is able to "talk the talk" on inflation. However, whether he can truly "walk the walk" will be answered at the September FOMC meeting and subsequent policy actions.