Goldman Sachs Pushes Back Against Hawkish Warsh Tone at Jackson Hole

Goldman Sachs' chief economist Jan Hatzius disagrees with the market's reaction to Federal Reserve Chairman Kevin Warsh's hawkish tone at Jackson Hole. Despite Warsh's emphasis on getting underlying inflation back to the Fed's 2 percent target, Goldman still expects the FOMC to hold rates steady at its September meeting.

According to Hatzius, Warsh's speech was his most hawkish appearance yet as chairman, but argues that the shift in tone is unlikely to be enough on its own to produce a rate hike next month. Warsh acknowledged recent PCE and CPI readings were better than expected, but argued they do not show a meaningful improvement in underlying inflation trends.

Goldman's forecast suggests that core CPI and core PCE inflation will print around 0.2 percent for August, a pace the firm views as insufficiently firm to justify the kind of policy response Warsh's remarks implied. The bank's base case remains that the Federal Open Market Committee will leave rates on hold at its September meeting.

The August CPI and PPI releases are likely to be crucial in determining the outcome of the September decision, with any upside surprise in the inflation data validating Warsh's framing and increasing the odds of a rate hike. Conversely, a soft outcome would probably see the front end of the Treasury curve retrace some of Friday's rise and could take pressure off equities that fell on rate concerns.