8 key takeaways from Warsh at Jackson Hole

Executive summary

Federal Reserve (Fed) Chairman Kevin Warsh’s remarks were more focused on inflation than employment during his speech at the Jackson Hole Economic Policy Symposium. While he didn’t commit to a September rate hike, his assessment of persistently high inflation, economic resilience, and non-restrictive financial conditions seemed to keep a hike firmly on the table. From an investment perspective, Warsh’s comments and expanded Treasury buybacks reinforce our constructive view on duration.

From an equity perspective, the bull market remains intact. However, after the earnings season skewed heavily to the positive side, we expect more of a tug-of-war in the near term as the market shifts its attention back to macro factors, creating a more two-way market.

8 key takeaways

1. Rate-hike odds moved higher

Although Warsh didn’t explicitly signal a hike, his message stressed the importance of upcoming inflation and employment data. That increased market-implied odds of a September hike from 36% before the speech to 56% within the following hour.

2. The initial bond-market reaction was a flatter yield curve

U.S. Treasury yields rose across the board. This initial yield-curve flattening suggests investors interpreted Warsh’s comments hawkishly, particularly the firm commitment to returning inflation to its 2% long-run target. The combination of Warsh’s comments and the U.S. Treasury Department’s increased buyback plan for longer-dated U.S. Treasuries reinforces our constructive view of duration.

3. Inflation is taking priority over employment, making near-term rate cuts unlikely

Warsh said the Fed’s “predominant focus right now should be on prices.” He characterized labor markets as stable and consistent with full employment, reducing the urgency to provide monetary-policy support. Accordingly, the bar for near-term rate cuts is very high.

4. Better recent inflation readings don’t mean “mission accomplished”

Warsh noted that better-than-expected inflation readings recently for Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) don’t demonstrate that underlying inflation trends have “meaningfully improved.” In perhaps his most hawkish comment of the speech, he said that inflation must move toward the Fed’s objective “clearly and at sufficient speed” and that, if it doesn’t, then the Fed still has “work to do.”

5. The Fed remains firmly committed to its 2% target

Warsh described the Fed’s 2% PCE inflation objective as a “firm, fixed target.” Headline PCE inflation is running at 3.7% over the past year and at a 4.1% annualized pace over the past six months, leaving inflation well above the Fed’s objective. Warsh highlighted that 54% of the 199 components in the PCE basket increased by more than 3% over the past year. That is below the post-pandemic peak of approximately 77% but remains well above the 32% level during the two decades before the pandemic.

6. Warsh is monitoring a broad market dashboard

The Fed Chairman highlighted credit spreads, lending conditions, Treasury trading, the U.S. dollar, commodities, market internals, capital spending, earnings trends, jobless claims, and inflation expectations. Collectively, he said these indicators led him to conclude that the economy remains resilient and broad financial conditions aren’t restrictive right now.

7. Interest rates remain the Fed’s primary policy tool, not forward guidance

Warsh was clear that short-term interest rates are the predominant tool for achieving the Fed’s dual mandate of maximum employment and price stability. While unconventional policies may be appropriate during crises, such tools should be used sparingly, if at all. Similarly, he said that the Fed intends to use forward guidance far more sparingly than previous Fed regimes, allowing markets to draw their own conclusions around economic activity, labor, inflation, and the most likely course for monetary policy.

8. Market focus is shifting from earnings to macro factors

The initial equity-market reaction was mixed, which reinforces a broader transition from a strong earnings backdrop toward macro factors such as inflation, employment, interest rates, and financial conditions. Upcoming CPI and employment reports will be critical in determining whether a September rate decision remains a close call or shifts more decisively toward a hike.

Warsh didn’t commit to a September hike, but he made the hurdle for holding rates steady clearer: inflation must show more improvement. With the economy resilient, employment stable, liquidity expanding, and financial conditions not restrictive, the Fed has room to keep its focus squarely on restoring price stability. The Fed’s emphasis on taming inflation is supportive of our positive view of duration.

The equity bull market remains intact, though we expect a more uneven near-term path as the focus shifts from strong earnings to macro factors. This transition is likely to create a more two-way market.