Fed Chair Warsh's highly anticipated remarks at the Jackson Hole Fed Symposium did not disappoint. Warsh's last Fed meeting press conference left many wondering how serious he was on using the Fed's rate-setting tools to fight inflation. He clearly stated that policymakers will return inflation to their 2% goal (annualized PCE, the existing standard), which he said "...is a firm and fixed target." He also stated: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job…our mandate…and our charge to keep." He also emphasized the Fed Funds Rate as the primary tool of Fed policy and thereby threw cold water on the use of unusual tools such as quantitative easing (the Fed buying Treasuries and mortgage bonds, aka "using the balance sheet"). This throws cold water on the speculation that the Fed would coordinate with the Treasury to expand the balance sheet and buy bonds (see Secretary Bessent's recent "buyback" announcements).
Market Reaction: Yields for 2-Year Treasuries jumped by as much as 9 bps, to 4.32%, while 30-year yields dropped 2 basis points, to 5.17%. Fed futures pricing for a rate hike at next month's meeting spiked to over 50%, up from 36% just hours earlier. Markets signaled they have confidence in the new Fed Chair's commitment to maintain price stability and his recommitment to a 2% annualized PCE reading as the continuing threshold target for inflation, thereby assuaging market fears that he might be "index shopping" in order to justify politically motivated rate cuts and, in doing so, asserting Fed independence.
Getting into the weeds: Warsh displayed his attention to detail when discussing PCE: "I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs." Again, this statement emphasized that the inflation target is 2.0% PCE, no change.
Forward Guidance: Forward Guidance is "ill-suited to normal times." Warsh remarked that forward guidance was appropriate in the years following the GFC in 2008, during a time of "secular stagnation." Warsh went further, even ruling out "explicit reaction function," aka the Fed signaling what it would do if a certain data point came in hot or cold. He likened forward guidance to the "Hall of Mirrors" conundrum: Markets watch the Fed for guidance, while the Fed watches markets for direction on policy, and it becomes a "dual feedback loop."
Philosophy summarized: "I stand here today committed to a discipline, not to a decision." …Stay tuned…
