Federal Reserve Chair Kevin Warsh used his first Jackson Hole keynote to deliver a blunt message: inflation has not cooled enough, and the central bank may need to raise rates rather than cut them. The remarks, delivered Friday at the Fed's annual symposium in Jackson Hole, Wyoming, were markedly more hawkish than markets had priced in, sending traders scrambling to reprice the path of policy weeks ahead of the Fed's September meeting.
"While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved," Warsh said, according to CNBC's report on the speech. He added that the Fed needed to see inflation moving toward its 2% target "clearly and at sufficient speed. Otherwise, we have work to do."
Rate-Hike Odds Jump
The market reaction was immediate. The implied probability of a quarter-point rate increase at the Fed's September 15-16 meeting, as tracked by the CME Group's FedWatch tool, jumped to roughly 56% to 57% from about 35% a day earlier — a swing traders described as turning the September decision into a coin flip, according to a Yahoo Finance live market recap. Treasury yields rose across the curve: the 10-year note climbed 4 basis points to 4.72%, while the more rate-sensitive 2-year note rose roughly 8 basis points.
Equities gave back part of the week's gains. The S&P 500 fell 0.25% to 7,711.76, the Nasdaq Composite dropped 0.52% to 26,402.42, and the Dow Jones Industrial Average slipped a more modest 0.02% to 53,559.99. All three indexes nonetheless closed the week higher, buoyed by Thursday's rally following Nvidia's blowout earnings report.
Warsh, who took over as Fed chair earlier this year, also used the address to distance himself from forward guidance — the practice of signaling the Fed's likely rate path in advance. He said the tool "has overstayed its welcome" and that he was "committed to a discipline, not to a decision," a framing that reporting on the speech described as an attempt to restore the kind of ambiguity that characterized the Fed's approach before the 2008 financial crisis, when policymakers gave markets fewer explicit signals.
Investors now turn to August's jobs report and the next inflation reading, both due before the Fed's September meeting, to see whether Friday's repricing holds. A hike would mark a sharp reversal after more than a year in which markets had largely bet on a steady easing path, and would test how much tolerance stocks near record levels have for tighter policy even as corporate earnings, led by Nvidia's results this week, continue to beat expectations.
