Federal Reserve Chair Kevin Warsh used his first Jackson Hole keynote to stake out an aggressively hawkish position on inflation, declaring the central bank’s predominant focus should be on prices as PCE inflation sits at 3.7 percent, well above the 2 percent target.
In his speech titled “In Our Time,” delivered Friday at the Kansas City Fed’s annual symposium in Wyoming, Warsh signaled the Fed is in no hurry to cut rates and may need to hold them higher for longer than markets had hoped. The dollar strengthened and Treasury yields rose on the remarks, which analysts described as the most hawkish Jackson Hole address in years.
Warsh revealed that the six-month annualized PCE reading has climbed to 4.1 percent, even more alarming than the 12-month figure. Consumer price index measures tell the same story, he said, with core inflation across multiple gauges running persistently above target. “None of these measures are perfect, but they all tell a similar story: inflation is running above our 2 percent target,” Warsh told the audience of central bankers and economists.
The speech marked Warsh’s debut at the annual gathering, which has historically served as a platform for major Fed policy shifts. He took office nearly 100 days ago after being nominated by President Donald Trump to replace Jerome Powell. His appointment was initially seen as potentially inflationary given Trump’s preference for lower rates, but his address made clear he intends to prioritize price stability above all else.
Rejection of Forward Guidance
One of the most striking elements was Warsh’s rejection of forward guidance, the practice of communicating anticipated future rate moves to markets. He argued the Fed should avoid making “quasi-commitments on interest rates through the cycle” because doing so “inhibits our own freedom to make the right calls when it’s time to decide.”
He called the current communication regime a “hall-of-mirrors problem” where markets rely on the Fed for guidance and the Fed relies on market prices, creating a dangerous feedback loop. Warsh said the Fed should instead draw on a wide range of market signals, including asset prices, Treasury trading volumes, the dollar’s exchange value, credit availability, and commodity prices.
Warsh stressed that market participants should form their own expectations rather than looking primarily to the Fed for direction on their next trade. “The Fed should be humble and never naive,” he said. “We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”
Labor Market Not the Priority
On employment, Warsh was more sanguine, describing the labor market as “broadly consistent with full employment.” He acknowledged concerns about limited growth in labor supply affecting monthly jobs figures and noted challenges for recent graduates, but said overall the employment side of the Fed’s dual mandate was not cause for alarm. This contrasted sharply with his assessment of inflation, which he called “more concerning.”
Warsh also took direct responsibility for the Fed’s role in the prolonged inflationary episode. “There is one signal nobody can miss: the responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank,” he said. “And that is where it belongs.” The comment was notable for its candor, placing blame on the institution he now leads for what has been the longest stretch of above-target inflation since the early 1980s.
“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.”
The remarks sent a clear signal to financial markets. Jeffrey Roach, chief economist at LPL Financial, said the speech represented “a new era of monetary policy, one defined by less signaling, greater emphasis on real-time data, and a willingness to rethink economic orthodoxy.” Bret Kenwell of eToro noted that Warsh “has been adamant that the Fed should communicate less frequently, viewing forward guidance as inappropriate outside of a crisis.”
Political Implications and Market Fallout
The hawkish tone creates tension with the Trump administration, which has repeatedly pushed for lower rates to stimulate growth. Trump’s approval rating has dropped to 33 percent in the latest Reuters/Ipsos poll, partly driven by persistent inflation and rising gasoline prices tied to the Iran conflict. Warsh’s speech suggests the Fed will not bend to political pressure for rate cuts, a position that could deepen the rift between the White House and the central bank.
Warsh also addressed inflation expectations, warning that while they are “well anchored” at present, they must be “closely minded.” He noted that in economic history, market measures of inflation expectations “tend to look strong and durable until they don’t,” and it is the Fed’s job to ensure they do not become unanchored. The speech was widely interpreted as laying the groundwork for the Fed to maintain restrictive policy well into 2027, with rate cuts pushed further into the future than markets had priced in before the address.
Markets reacted swiftly. Treasury yields climbed across the curve, with the two-year yield rising eight basis points to 4.32 percent, while the dollar index gained 0.6 percent against a basket of major currencies. Stock futures dipped modestly, reflecting the reduced expectation of near-term rate relief. Traders now price in at most one rate cut before mid-2027, down from two or three cuts expected before the speech.
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