Fed Chair Warsh Signals Rate Hike May Be Coming After First Jackson Hole Speech

Federal Reserve Chairman Kevin Warsh delivered his first keynote address as chair on Friday at the Kansas City Fed's annual economic symposium in Jackson Hole. He used the moment to lay out a case for why an interest rate hike could be on the table in the coming months.

Warsh puts inflation front and center

Speaking at the Fed's conference, the chairman made clear that the inflation price pressures are his main concern. 

"Inflation is running above our 2% target. So the Fed's predominant focus right now should be on prices," he said. He added that even with the recent inflation readings coming in better than expected, they did not change his read on the situation. "They do not tell me that underlying trends have meaningfully improved," he said.

Warsh also pushed back on doubts that the Fed could bring inflation under control. "Market prices show confidence that we will deliver price stability," he said. "And I can assure you, they're right."

The comments are a change from how Warsh has handled public remarks since becoming chair in May. He has been criticized repeatedly for declining to spell out his "reaction function," which could suggest whether he would push to raise or lower rates. The speech was the first time he has ever done that.

Why the Jackson Hole speech carried so much weight

This address couldn't have come at a more pivotal time. Bond yields have climbed since Warsh's July press conference. This led to Treasury Secretary Scott Bessent announcing plans to double the size of the department's weekly debt buyback program.

That and the investor concern that the high consumer prices had put Warsh under pressure to say something more concrete.

"We're in a unique set of conditions here, where actions by the Treasury have undermined Warsh's move. Therefore, the Fed chair is in between a rock and a hard place," Joseph Brusuelas, chief economist at RSM, said.

Ahead of the speech, investors had priced in a 37.5% chance that officials would raise rates at the September meeting after the Federal Reserve kept the benchmark rate steady in a range of 3.5% to 3.75% in its las meeting.

Rate probabilities for the upcoming FOMC Meeting. Source: CME FedWatch tool

Strong economy, but some cracks are showing

Steering away from the inflation pain point, Warsh was mostly upbeat on the economy. 

"For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened," he said.

He pointed to the resilience on Main Street and Wall Street as a sign of strength. He did note some soft spots, saying "certain sectors like housing and agriculture are showing strains." 

On employment, Warsh acknowledged that recent graduates have faced a tougher job market. However, he said overall the market is still healthy, noting that "labor markets are consistent with full employment," which means people looking for work can find it.

Reverting to future rate decisions, Warsh said a "good majority" of his colleagues agreed in July that it made sense to wait more weeks for data before deciding if a policy change was warranted.