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In his Jackson Hole speech, Fed Chair Kevin Warsh flagged AI’s growing but uncertain macroeconomic role, reaffirmed the 2% PCE inflation target, and offered an upbeat read on a resilient economy while implicitly signaling possible monetary tightening—prompting markets to price a September rate hike as the base case.
What caught our eyes this week
Takeaways from Jackson Hole
What did Fed Chair Warsh tell us in his eagerly awaited speech in Jackson Hole? First, he pointed to artificial intelligence as an increasingly large factor in shaping the macroeconomic environment, but admittedly one that still offers more questions than answers. He then defended his withdrawal of forward guidance, stressing the need for clear market signals that avoid the “hall-of-mirrors problem” where markets look to the Fed, but the Fed looks to markets. He reaffirmed his committee’s inflation target: 2% annual growth of the PCE price index. He then gave us his read on the current economy, noting strong recent displays of resilience, healthy spending by both consumers and businesses, a labor market holding steady near full employment, and an inflation picture that has seen only modest progress to target over the past few years. As expected, Warsh stopped short of anything that could be construed as forward guidance, but it certainly felt like he was attempting to presage a tightening of monetary policy. Was this just more jawboning and biding time in hopes of another good Consumer Price Index report before the next meeting? Time will tell, but for now, markets are taking him at his word, with a September rate hike back to the base case in federal funds futures markets.
CHART OF THE WEEK: Cerity Partners, Federal Reserve
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