Warsh offers markets a glimpse of his reaction function, September rate odds climb
Bond markets arrived at Jackson Hole, Wyoming pressing for direction on the rate path. Federal Reserve Chair Kevin Warsh, in his debut speech to the Kansas City Fed's annual economic symposium on Friday, gave them enough to move…
Key takeaways
- Fed Chair Kevin Warsh, in his debut speech at the Kansas City Fed's Jackson Hole symposium on Friday, offered a partial disclosure of his reaction function that markets found sufficient.
- Futures markets shifted toward expecting a rate hike at the September 15-16 policy meeting following the speech, with repricing extending to bonds and equities.
- The Fed left its policy rate unchanged in the 3.50% to 3.75% range at its July 29 meeting, where Warsh declined to signal any next move.
- Warsh said the Fed's standard is confidence that underlying inflation is moving to its objective clearly and at sufficient speed, and without it 'we have work to do.'
- Inflation has run above the Fed's 2% target for almost six years, prompting analysts to say Warsh's shift in tone must be matched by action.
Bond markets arrived at Jackson Hole, Wyoming pressing for direction on the rate path. Federal Reserve Chair Kevin Warsh, in his debut speech to the Kansas City Fed's annual economic symposium on Friday, gave them enough to move on. Futures markets shifted toward expecting a rate hike at the September 15-16 policy meeting after the speech, with the repricing extending to bonds and equities.
Warsh told an audience of global central bankers that the Fed's standard is confidence that "underlying inflation is moving to our objective, clearly and at sufficient speed," and that without it "we have work to do." He prefaced those remarks deliberately: "You can call it an outline, you can call it a trail map, just don't call it forward guidance." What followed was a partial disclosure of his reaction function. Partial, for markets, was enough.
The remarks arrive against the backdrop of a Fed that left its policy rate unchanged in the 3.50% to 3.75% range at its July 29 meeting, where Warsh declined to signal any next move. Since taking the reins in May, his reticence had left a communication gap that other Fed officials filled with their own views. With inflation running well above the central bank's 2% target, those officials have largely been willing to discuss higher rates openly.
Robert Tetlow, a research economist and former senior Fed staffer, said Warsh's concern that providing rate guidance distorts market pricing is overdone, but called it "very good for him to have gone through a rundown of how he sees the economy currently." Nathan Sheets, global chief economist at Citigroup, said having Warsh's diagnosis after the speech was "a meaningful step forward compared to where we were coming out of the July press conference."
Several Fed presidents have pressed for more openness throughout. New York Fed President John Williams told Reuters earlier this month that ending forward guidance at the June 16-17 meeting was "exactly the right call." Cleveland Fed President Beth Hammack told Bloomberg TV on Friday that communicating her policy viewpoints is "a critical part of the job" because it helps businesses and households make better-informed decisions. Chicago Fed President Austan Goolsbee, in an interview on the podcast Rapid Response made public Thursday, said that without some explanation of how the central bank reacts to data, "people are going to fill in whatever they want it to be," which he said can lead to more market volatility, not less.
Patrick Harker, former Philadelphia Fed president and now a professor at the University of Pennsylvania's Wharton School, drew the clearest line: with inflation above the Fed's 2% target for almost six years, Warsh's shift in tone must be matched by action. "Actions speak way louder than words," Harker said. The September 15-16 meeting will be the first test of whether they are.
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