Kevin Warsh used his first Jackson Hole speech as Fed chair to double-, triple- and quadruple-down on what, forgive me, feels like a pathological aversion to forward guidance.
He also reiterated, in seemingly unequivocal terms, that i) inflation’s been far too high for far too long, ii) the responsibility for that overshoot falls squarely on the shoulders of the institution he now leads and iii) the Fed will restore price stability, defined as 2% annual PCE inflation, which he called “a firm, fixed target.”
In other words, Warsh’s Jackson Hole speech, entitled “In Our Time,” was a long-winded version of his June FOMC press conference (the one that didn’t go awry) and his remarks in Wyoming betrayed the same cringeworthy pretensions to oratory eloquence on display during both the June and July pressers.
From where I’m sitting anyway, Warsh’s excoriation of policymaker over-communication carries an air of “The chair doth protest too much, methinks.” He says all the “right” things when it comes to critiquing the pitfalls associated with excessive forward guidance, but try as he might to come across as reflective and sincere, Warsh’s comments sound scripted, and not just because, in this case, he was reading from a pre-written speech.
Consider that Warsh dedicated a whole section of his Friday address to explaining why he thinks the Fed should do less explaining. That section by itself clocked in at an impressive 839 words. Warsh, then, wrote an entire essay about over-communicating. The irony was lost on him.
To be fair — and he mentioned this — Warsh’s disdain for forward guidance goes back a very long way. It’s not a newly-adopted position, and can’t be chalked up to some backdoor deal with Donald Trump.
But it’s important to note that Warsh’s line of criticism typically (indeed, almost exclusively) centers around the notion that post-Lehman forward guidance, because it pledged to keep money cheap and abundant in perpetuity, served to suppress volatility, perpetuate unduly loose financial conditions and encourage excessive risk-taking. No one’s asking that from Warsh.
Currently, many market participants are wondering instead about the glaring incongruity between, on the one hand, Warsh’s supposedly steadfast commitment to restoring price stability amid a long-running inflation overshoot and, on the other, his almost petulant refusal to hint at rate hikes.
“Over the past 12 months, 54% of goods and services in the PCE basket showed price increases above 3%,” Warsh said Friday. “This is well below the post-pandemic highs of about 77%, but it remains well above the level of 32% in the two decades that preceded the pandemic.” He continued:
The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs. Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, our mandate and our charge to keep.
Right. So — and pardon me in advance for the profanity — what’s the f-cking hold up? Why the reluctance even to allude to a rate hike? Why so damn coy?
In the very next sentence of his speech — which was also the last sentence of the concluding paragraph — Warsh said, “I stand here today committed to a discipline, not to a decision.”
In other words: Despite repeated concessions regarding the persistence of a meaningful inflation overshoot that the Fed’s duty-bound to redress, and despite conceding that outside of housing, he’d be “hard pressed to describe broad financial conditions as restrictive,” Warsh isn’t willing to suggest publicly that the Fed’s next move is at least as likely to be a hike as a(nother) hold.
Ostensibly, that reticence is just a reflection of Warsh’s commitment to eschewing over-communication. But color me skeptical. I think he’s using his on-the-record, historical position on forward guidance as an excuse for equivocating, so as not to irritate The White House with direct references to imminent rate hikes.
For their part, markets were back to giving Warsh the benefit of the doubt on Friday. His remarks on inflation were read as hawkish. As such, the speech engineered a sharp bear flattener, reminiscent of the price action following the June FOMC.
As the figure above reminds you, the July FOMC press conference triggered the opposite reaction in the curve, which bear steepened in a sign that Warsh was on the way to squandering whatever credibility he established the prior month.
At 4.34%, twos were 71bps — so, nearly three “hikes” — wide to EFFR on Friday in the wake of Warsh’s speech. Pricing for the September meeting moved as high as 57%.
Warsh bought himself — and, indirectly, Scott Bessent — three weeks in Jackson Hole. But if he doesn’t hike next month against what’ll very likely be the same dissents he faced in July, markets will have little choice but to punish him in true “fool me once” fashion.
As Bloomberg Intelligence’s Ira Jersey put it, “Warsh is starting to back himself into a corner.” If those market-implied odds are meaningfully above 50% on the eve of next month’s FOMC gathering, Warsh will have a choice to make: Hike ahead of the mid-terms or face a market revolt.
Warsh wants to be a billionaire invited to all the best parties. Not the next “Tall Paul”, esteemed by the finance punditry for the next few decades.
On the other hand, perhaps he will try to stave off a major correction until the infantry classes vote, as a nice strong market vol event would “justify” forceful YCC and the SWF to bag hold all the PE MTM and Trump coins…
I’ve listened to hundreds of central bank (FOMC, ECB AND BOE) pressers and speeches over the past 30 years and they rarely offer up anything of value. This was no different: adopt a mildly hawkish tone, talk the market into the place you want it (a flatter curve) and NEVER pre commit. So Warsh has bought himself a little time but it’s going to be a very interesting meeting on the 16th of Sep; if he doesn’t back up today’s speech the market will know he’s a potus patsy and his credibility and fortitude will be under severe pressure.
As you pointed out, 2s at 4.34% vs the fed funds rate means a carry rate of 71bps – almost a lock for a hike (75bps is normally the signal for an imminent hike) and this with cheapening in the 5s points to the mkt expecting a hike (plus sofr now signaling a 50% chance of a 25bps move). I totally agree with Bloomberg’s Ira Jersey, warsh is backing himself into a corner. He should have taken a leaf out of Jean Claude Trichet’s book of banality: speak for long but tell them nothing (hence why most conferences are pointless imho).
Warsh knows he needs to raise rates. He also knows his boss demands cuts. Trying to convince Trump that the economic conditions demand a raise will only get you fired. Trump will not be swayed, after all this is the guy who can’t stop demanding his name on the Lincoln Center. His latest tantrum has him threatening to tear the whole thing down if he doesn’t get his way. It should be quite a show when Warsh does his first 25 bp raise. The prediction markets should light up on how many Truth posts there will be in the first 24 hours pointing out what a loser lowlife Warsh is. The Trump takes no prisoners.
Yes–“cringeworthy pretensions to oratory eloquence.”
It was painful to listen to Warsh’s incoherence. He was all over the map, saying one thing one minute then taking it back the next. His ‘principles’ said a lot but not much at all absent the tough implementation decisions to be made in the context of AI-related buildout uncertainties. He muddied the waters around his AI message, identifying some legitimate uncertainties fairly well, then implying his task forces will somehow solve the uncertainty problem. Or not. Worth noting his task force on productivity is led by Marc Andreesen and another guy with AI investments…Any doubt about that task force’s conclusion?
I have read about how Warsh supposedly wants the markets to focus on the economic data and not on the Fed’s future action.
This doesn’t really make sense to me. The data, plus the Fed’s mandate to control inflation, will inevitably cause the markets to expect certain future action from the Fed. If the Fed takes the action that the market expects, then what does it matter if the Fed guided to it or not? If the Fed fails to take the action that the market expects, then the Fed’s commitment to inflation control will in question, and Warsh will have to try to explain why Fed inaction was consistent with inflation control. That explanation is not going to be more convincing after-the-fact.
I get the longing for the old days of Greenspan etc, when men were men and not babies being spoon-fed by Nanny Fed. But markets and the economy are more leveraged and more financialized, and institutional credibility less abundant, than 20+ years ago. I think that more-Fed-surprise-driven volatility may fall into the “be careful what you wish for” category.
Yeah. This is a good / accurate take.
“I get the longing for the old days of Greenspan etc, when men were men and not babies being spoon-fed by Nanny Fed”
That’s me among others. So we are now beholden to providers and users of massive leverage?
Though you may recall that it was the Great Delphic Oracle who helped get this all rolling when he OK’d raising the permitted leverage in the banking industry to something like 50x. Later in life he confessed that he should not have swallowed Ayn Rand’s nonsense that bankers would never do anything that would put their shareholders at risk. Ooopsie ….
I’m most surprised that a Trump appointee blamed anyone other than Biden for “65 months of sustained, elevated inflation.” I guess Kevin really is holding on to the pretense of Fed independence.
I think he is stalling, full stop, just hoping to catch a break. A conclusion to the war with Iran would really help, but seems unlikely anytime soon. If he truly needs Trump’s permission before he can hike, things may have to get worse before he will move. Even a 25 basis-point hike in September may not help as it may be seen as too little. Rates were up across the board today, with the 1-5-year durations all gaining around 10 basis-points or more.
Until proven otherwise, I will assume Warsh will use his public speaking to gaslight all but the chosen few and that he will always find an excuse not to raise rates while Trump is in office. As for his admitting that rates have been too high for too long, perhaps this is just an introduction to “inflation didn’t happen on my watch” with poor delivery.
Amazing to me how an Administration that does whatever it wants, whether by fiat, EO or just plain breaking norms, coupled with a seemingly limitless permission or even encouragement to flat out lie (or blame someone else), continually paints itself into a corner. Once again, hubris is to blame — knowing more than anyone else about everything kinda falls flat in the face of rising inflation and interest rates, a soaring budget deficit, and yet another Middle East quagmire. But hey, I hear Washington DC looks better than ever, if you overlook the Reflecting “Lake,” the Ellipse, Lafayette Square, and East Potomac Park among others. And a credible source tells me that people are finally going out to DC restaurants again after a four year complete hiatus. Maybe it’s time to appoint some DC restauranteurs to the Fed — they are clearly proven miracle workers to endure 4 years of zero revenues and still keep the doors open.