Federal Reserve Chairman Kevin Warsh used his closely watched Jackson Hole address Friday to signal elevated concern about inflation and outline a new philosophy for the central bank.
Speaking at the Fed’s annual economic symposium in Jackson Hole, Wyoming, Warsh declined to commit to either forward guidance or a formal reaction function for monetary policy.
Instead, the chairman used the speech as a broad statement of his governing principles, marking his 100th day in office since taking the helm in May.
“While this summer’s [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh told attendees, which included fellow policymakers on the Federal Open Market Committee, economists, and media.
He underscored the urgency of tackling price pressures, adding: “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.”
Markets responded sharply to the remarks, with Treasury yields moving substantially higher and the policy-sensitive 2-year note rising nearly 8 basis points to 4.31%, its highest level since late July.
Traders simultaneously raised the probability of a rate hike at the September policy meeting to 55.7%, roughly 20 percentage points higher than the previous day, according to the CME Group’s FedWatch tool.
Heather Long, chief economist at Navy Federal Credit Union, said Warsh “opened the door to a Fed rate hike,” adding: “A hike probably won’t come in September, but it will by October or December.”
Long said Warsh “explicitly said this summer’s encouraging inflation readings don’t indicate ‘meaningful’ improvement on inflation” and that “bond markets reacted swiftly by pricing in a hike.”
Despite the inflation warnings, Warsh expressed broad confidence in the broader economy, saying it “appears to have strengthened,” and pointed to resilient business and consumer spending alongside benefits from artificial intelligence.
He also acknowledged a slowdown in hiring but attributed it to a flattening of labor supply rather than weakening demand across the economy.
A central theme of the address was Warsh’s push to redefine the Fed’s relationship with financial markets, calling for a “quieter Fed, more purposeful in its communications.”
“We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade,” he said, in a pointed departure from the approach favoured by recent predecessors.
Warsh took aim at the practice of forward guidance, quipping that “you can call it an outline, you can call it a trail map, just don’t call it forward guidance,” a practice he said “has overstayed its welcome.”
“I stand here today committed to a discipline, not to a decision,” he told the audience, framing his approach as one based on structural rigour rather than specific policy signals.
Critics have questioned Warsh’s reticence to give markets clearer direction, particularly while inflation remains well above the Fed’s 2% target, but the chairman defended the approach as appropriate given economic complexity.
He acknowledged the calls for a reaction function directly, but argued that “our knowledge just doesn’t extend that far — at least not yet — and the factors most relevant to the proper conduct of monetary policy change over time.”
Since taking office, Warsh has launched five task forces to examine a range of Fed functions, with a consistent focus on reducing market dependence on central bank commentary and rhetoric.
He noted that market prices already “show confidence that we will deliver price stability,” adding: “And I can assure you they’re right.”