Fed chair Warsh puts markets on notice at Jackson Hole: inflation 'has not meaningfully improved'

JACKSON HOLE, Wyo. - Federal Reserve Chairman Kevin Warsh walked to the podium Friday morning and did what he has made a habit of not doing: he said almost enough.

In his first address at the Kansas City Fed's annual economic symposium here, Warsh warned that inflation remains too high and that the central bank "has more work to do," stopping short of a firm commitment to raise rates at the Fed's next meeting in mid-September - but not ruling it out either. The Washington Post reported that he told the audience he was "impressed" with the economy's overall strength but is concerned by signs that "underlying trends" in inflation have not improved.

The speech landed in Washington like a half-answered question. Bond traders and lawmakers monitoring the Fed's next move had waited all summer for this moment. They got a trail map, not a destination.

What Warsh actually said

Federal Reserve Chairman Kevin Warsh expressed concern Friday about elevated inflation while hinting that interest rates could need to move higher if more progress isn't made on easing price pressures. His address, titled "In Our Time," was the first extended public statement of his economic thinking since he replaced Jerome Powell in late May.

Warsh acknowledged that recent U.S. reports show that inflation has cooled a bit, but said "they do not tell me that underlying trends have meaningfully improved."

He was deliberately opaque on the mechanism. Warsh avoided committing either to forward guidance or a reaction function for monetary policy, instead using the presentation as a broad look at his approach to governance. He announced at the top of the speech that listeners could call his remarks "an outline" or "a trail map," but "just don't call it forward guidance," a practice he said "has overstayed its welcome."

On the question of whether markets should read the Fed's signals: "We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade," he said.

That line - deliberately aimed at breaking the dependency on Fed communication that his predecessors cultivated - drew immediate reaction. Joseph Brusuelas, chief economist at RSM, said before the speech: "We have the most unusual Jackson Hole monetary symposium in recent memory on deck because of Warsh's unforced errors early in his tenure."

The numbers behind the warning

Warsh did not deliver his inflation caution in a vacuum. The 30-year Treasury yield hit a 19-year high last week before briefly falling after Treasury Secretary Scott Bessent announced plans to double the maximum amount of long-term debt the government can buy back. The Fed's preferred inflation gauge this week also showed prices rising 3.7 percent over the past year, while the economy shed 23,000 jobs.

Warsh spoke with inflation at 3.4 percent and the 30-year Treasury yield near its highest level since 2007. Both figures are far from where policymakers would like them. He pointed to data showing that inflation remains stubbornly above the central bank's 2% target.

Markets moved fast. Investors currently see roughly a 34% chance that Fed officials will raise rates at their September 15-16 meeting, up from lower odds before the speech. The U.S. stock market held steady after the speech, but expectations are building in the bond market for the Fed to hike interest rates.

A new Fed chair, a new style - and a Washington audience watching closely

Warsh became the seventeenth chair of the Federal Reserve on May 22, succeeding Jerome Powell. He has held just one FOMC meeting, at which he kept the benchmark federal funds rate steady at a target range of 3.5% to 3.75%. Friday was his only real chance before September's meeting to say something definitive. He chose not to.

Warsh's speech differed from his predecessors, who often utilized Jackson Hole either as a cue on the direction of rates, broad changes to the Fed's framework, or to delineate new ways of approaching monetary policy. At last year's event, then-Chair Jerome Powell hinted at rate cuts ahead, setting off an aggressive rally on Wall Street.

Warsh has set up five task forces aimed at taking what he calls a "first principles" look at Fed functions. Among their tasks are an assessment of how policymakers view inflation, the balance sheet, the data points that influence decisions, technology-related issues and communications. On the final point, Warsh has taken a unique approach compared to his recent predecessors: rather than seeking to steer reaction through carefully placed signals, he has preferred a more hands-off approach that lets markets interpret data and send signals to the Fed.

Warsh has drawn repeated criticism for refusing to spell out his "reaction function" - meaning the economic circumstances under which the Fed would move rates in either direction - and investors saw Friday's address as his clearest opening yet to fill that void, according to CNBC. He did not fill it.

That refusal carries concrete stakes for federal fiscal policy. Congressional appropriators are already bracing for a Dec. 11 deadline - the Senate passed a continuing resolution 90 to 6 on August 8 to fund the federal government through that date, averting a potential government shutdown. Any rate increase by the Fed in September would raise borrowing costs on Treasury debt at exactly the moment Congress is trying to negotiate full-year spending bills, adding pressure to deficit projections already stretched by the 2025 tax package.

Senate Majority Leader John Thune had pointed directly to the stakes: "The American people have faced two - two - record-breaking government shutdowns in the past 10 months. We need to ensure that they do not face a third," he said late last week. Higher rates complicate that math.

Treasury Secretary Scott Bessent, who has been managing the bond market's jitters separately through buyback announcements, has not commented publicly on Warsh's Friday remarks. His office did not respond to a request for comment before publication.

In his brief time at the helm, Warsh has sought to chart a new course that harkens back to the pre-financial crisis Fed where markets were given less certain signals and the Fed had a smaller hand. Whether that approach holds through a potential September hike remains the open question.

Comments from the new Fed chair appeared to reassure Wall Street that fighting inflation remains the priority for the central bank. Warsh did not imply that a rate hike is imminent, but he appeared to dismiss perceptions that inflation is no longer a threat.

The Fed's next scheduled meeting is September 15-16 in Washington.

What to Watch

• September 15-16 FOMC meeting: The Fed's policy committee convenes in Washington three weeks from now. Warsh's Friday remarks have moved market odds on a hike; any further inflation data before then - particularly the August CPI release, due September 11 - could tip the balance.
• Congressional reaction: Senate Banking Committee members have been critical of Warsh's opacity on forward guidance. A surprise September hike would likely trigger hearing requests from both parties.
• Treasury buybacks and the long bond: Bessent's move to expand buybacks steadied the 30-year yield temporarily. Watch whether that holds if Warsh's comments harden expectations of higher short-term rates.
• The CR deadline clock: Government funding runs through Dec. 11, but the House and Senate still have to reconcile their differing stopgap bills before Sept. 30. A rate hike in that window would land in the middle of an already tense appropriations negotiation.
• Warsh's five task forces: The internal Fed reviews on inflation, the balance sheet, and communications are due to report findings later this fall. Their conclusions could formally rewrite how the Fed signals policy - or don't.

Sources: The Washington Post | PBS NewsHour / AP | CNBC | Forbes | Quartz | The Hill | Sen. Kevin Cramer press release | Federal Reserve Board