Warsh Jackson Hole inflation warning signals possible hike: Analysis

Federal Reserve Chairman Kevin Warsh used his Jackson Hole speech Friday to answer critics of his muddled July news conference, delivering a clearer warning that stubborn inflation could push the Fed toward a rate hike.

Warsh’s first pair of news conferences as Fed chairman left many in the markets uncertain about where he stood on the path of interest rates, prompting bond traders to sell off long-term debt to account for the uncertainty. At a closely watched speech in Jackson Hole, Wyoming, on Friday, Warsh showed he had heard those critics. He came as close as he is ever likely to do to indicating he is on the precipice of raising interest rates if inflation doesn’t improve, based on his own idiosyncratic reading of price data. 

Warsh at Jackson Hole gave a more hawkish reading of the economy than he had in July. He said elevated prices needed to be the Fed’s main focus and described financial conditions as not being broadly restrictive, a change from his July news conference, when he said they were uneven. He did that while swiping back at his critics and insisting his policy of deliberate ambiguity about Fed policy is here to stay. 

“We can be held accountable for delivering on our remit — the only true test of our credibility,” Warsh said, dismissing widely echoed critiques that he had come across as not credible at his July news conference. 

The Fed won’t meet to set rates until mid-September, and Warsh didn’t explicitly say how the central bank would handle interest rates. But he dived into several of the critiques recently leveled at him. 

One of the harshest focused on Warsh’s description of how he sees the Fed’s core mission of assessing and responding to inflation. The Fed is formally committed to trying to keep inflation to 2% over the long term as measured by the personal consumption expenditures price index. Some economists interpreted Warsh’s muddled answers to reporters’ questions last month as saying he might want to change that target — even as inflation remains elevated. 

PCE inflation was 3.7% for July, according to government data released this week.

At Jackson Hole, Warsh recommitted to maintaining the 2% PCE goal, calling it a “firm, fixed target.” 

And he went further. Warsh gave examples of how he uses multiple measures of inflation to reach the conclusion that elevated prices are a concern. He referred to the underlying components of PCE inflation, saying 54% of components of PCE had been above 3% annualized inflation in the past 12 months, while 49% were above 3% in the past six months. 

Warsh described those figures as being lower than the recent pandemic inflation but still above the long-term trend — an indication he believes the Fed may need to raise rates. 

Warsh also referred to another gauge of inflation, the consumer price index, which is running at 3.4%.

“None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target,” he said.

That statement by…