Warsh, In Our Time

Warsh's first Jackson Hole as Chairman is a hawkish framing document. He says inflation at 3.7 percent 12-month PCE and 4.1 percent over six months is the predominant focus, labor markets are already consistent with full employment, and he would be hard pressed to call broad financial conditions restrictive. He also formally downgrades forward guidance as a tool and refuses to commit to a reaction function or a rate path, which removes a piece of the front-end anchor the market has traded off for fifteen years.

What’s new: Genuinely new: an explicit Chair-level statement that financial conditions are not restrictive, that labor markets are at full employment, and that the summer's better inflation prints do not signal improved underlying trend. Also new: the Chair killing regular forward guidance and explicitly declining to publish a reaction function or rely on Taylor-type rules, plus the line that money aggregates matter. Not new: the July minutes read of stable labor, solid output, inflation too high, and a majority preferring to wait. Nothing here hints at a near-term cut.

KEY FINDINGS

• "So the Fed's predominant focus right now should be on prices," with 12-month PCE at 3.7 percent and the six-month run rate at 4.1 percent, and 54 percent of PCE components running above 3 percent versus 32 percent pre-pandemic. A single-mandate hawkish framing from the Chair means the bar for cuts is inflation, not payrolls, and front-end pricing of easing needs to be marked down.
• He says he would be "hard pressed to describe broad financial conditions as restrictive," citing tight credit spreads, strong issuance, easier C and I standards and 20 percent S and P profit growth. If policy is not restrictive at the current rate, the implied direction of the next move is not down: risk of a hawkish repricing in 2026 OIS.
• Labor market declared "consistent with full employment" at 4.1 percent unemployment, with low monthly job gains explained away as weak labor supply rather than weak demand. Removes the soft-payrolls trigger for cuts: weak establishment prints no longer buy dovish optionality with this Chair.
• Forward guidance "has overstayed its welcome"; he refuses a mechanical reaction function or reliance on a Taylor rule and prefers a "quieter Fed." He also cites 2021 guidance as having slowed the response to inflation. Less policy signal means a higher term premium and fatter distributions around meetings: vol should be structurally bid, and short-rate expectations become more data-reactive.
• Warsh notes he and "a good majority" of colleagues favored waiting, and says summer's better PCE and CPI prints "do not tell me that underlying trends have meaningfully improved." He is pre-committing to discount favorable near-term inflation surprises, which raises the persistence needed in the data before easing.
• Money aggregates are back on the dashboard, and unconventional policy "should otherwise be used sparingly, if at all." Reduces the market's implicit put on QE and balance sheet support in a future risk-off, a term premium and duration negative.

FROM THE DOCUMENT

So the Fed's predominant focus right now should be on prices.

But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.

And while this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.

I stand here today committed to a discipline, not to a decision.