Warsh Speaks Out on Inflation as Markets React to Fed Plans

Fed Chair Kevin Warsh spoke at the Jackson Hole conference to address concerns about his commitment to fighting inflation. In July, he didn't provide forward guidance and left the impression that the Fed was comfortable with current monetary settings.

Warsh emphasized that the Fed's price-stability objective of 2% is a firm target and that it's not self-executing. He said the Fed needs to deliver stable prices, but the current inflation rate of 3.7% is above the target.

The markets reacted positively to Warsh's speech, with odds of a Fed rate rise after its September meeting increasing from less than 50% to over 60%. However, US Treasury Secretary Scott Bessent plans to start buying $4 billion in US longer duration bonds to supply liquidity and drive down yields.

This move could distort the signals Warsh is relying on and may confuse the pricing signals being sent to the Fed. The attempt is likely to be futile, but it could also raise fears of a 'dollar debasement' trade, which would devalue foreign investors' bond holdings.