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Federal Reserve Chair Kevin Warsh on Friday delivered his first keynote address at the annual Jackson Hole Symposium on monetary policy, outlining his views of the economy and his perspective on why he thinks the central bank’s forward guidance should be reined in.
Warsh emphasized that the Fed is focused on returning inflation to the central bank’s 2% target, acknowledging that bringing the personal consumption expenditures (PCE) index to that level is the “firm, fixed target” for policymakers. In July, PCE inflation remained at 3.7% compared with last year, which Warsh called “concerning” and said should be the focus of monetary policy.
The Fed chair also discussed the employment side of the dual mandate, saying that limited growth in labor supply is lowering monthly jobs figures, but that labor market data is “broadly consistent with full employment.”
Fed watchers have been critical of Warsh’s moves to clamp down on forward guidance about future interest rate moves, which he believes should be limited to when there are economic or financial crises – though his speech helped clarify those views for some.
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Seema Shah, chief global strategist for Principal Asset Management, said that “Warsh untangled much of the ambiguity left by the July FOMC press conference, presenting a clearer picture of a Fed that remains laser-focused on returning inflation to target and is prepared to raise rates if progress stalls.”
“Although we expect incoming data to improve, the risk of a September hike has increased. The positive market reaction highlights that investors place a premium on policy clarity, even when that clarity carries a more hawkish message,” Shah added.
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Gregory Daco, chief economist at EY-Parthenon, noted that Warsh’s speech came against a backdrop in which the Federal Reserve’s credibility and commitment to its price stability mandate was being questioned amid his resistance to providing forward guidance or discussing economic fundamentals.
“Nearly 100 days into his term as Fed chairman, Warsh delivered some long-awaited humility during his first address at the Kansas City Fed’s Jackson Hole Symposium, saying ‘we take our responsibility seriously, with humility and resolve,'” Daco said.
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“It appears Chairman Warsh realized that he couldn’t appear as the monetary policy maestro that he aspires to be without leading the orchestra to a flawless symphony first,” he said. “As such, he took up the task and delivered on three fronts that are basic principles for any central banker.”
“First, he provided a clear, fact-based and nuanced assessment of the U.S. economy, employment and inflation. Second, he reaffirmed PCE inflation as the gauge for the Fed’s 2% target and the fed funds rate as the main policy tool. Third, he suggested a reaction function indicating readiness to tighten should inflation fail to move sufficiently rapidly toward the 2% target,” Daco said.
Bret Kenwell, U.S. investment analyst at eToro, said that “Warsh has been adamant that the Fed should communicate less frequently, viewing forward guidance as inappropriate outside of a crisis.”
“That approach could result in more surprises for investors, and in turn, increased volatility. That’s particularly true if the Fed adopts Warsh’s view that there are ‘no excuses’ for failing to keep inflation in check,” Kenwell said.
Jeffrey Roach, chief economist at LPL Financial, explained that he believes, “We are entering a new era of monetary policy, one defined by less signaling, greater emphasis on real-time data, and a willingness to rethink economic first principles as AI reshapes the economy’s productive capacity.”
“The distinctly hawkish speech gave support to the dollar as the chairman appears comfortable keeping policy higher for longer,” Roach added.
