Warsh Faces Credibility Test at Jackson Hole

Kevin Warsh's first major speech as Federal Reserve chair is approaching, and he faces a major test for Fed credibility. The July press conference left investors with more questions than answers about why the Fed kept rates unchanged and how concerned policymakers remain about inflation.

Warsh wants the Fed to communicate differently, favoring less explicit forward guidance. However, reducing forward guidance is not the same as reducing explanation, which Warsh needs to establish at Jackson Hole.

The July policy decision itself was not particularly surprising, with a 9-3 vote to leave the federal funds rate at 3.50% to 3.75%. The controversy came afterward, when Warsh struggled to give investors a clear explanation for why the majority chose to hold and avoided presenting another rate hike as an obvious policy tool.

The economic data has changed since the July meeting, with retail sales falling in July by the most in more than a year, core inflation being relatively subdued, employers cutting jobs, and payroll growth revised lower. This gives Warsh an opportunity to make a more nuanced argument that the Fed can remain concerned about inflation without automatically raising rates.