Warsh's Hawkish Tone Raises Pressure for September Rate Hike

Bank of America says Federal Reserve Chairman Kevin Warsh's Jackson Hole speech has effectively committed him to a September hike unless the data turns unusually soft. The bank claims that Warsh's clarification on his focus on delivering 2% PCE inflation resolves ambiguity left by his July press conference comments.

Warsh detailed his view of underlying inflation, noting that 54% of goods and services in the PCE basket are running above 3% year-on-year, a far higher share than before the pandemic. This does not amount to a strict rule for policy but represents considerably more transparency about how he separates persistent inflation pressure from one-off shocks.

Warsh's pushback against the idea that the Fed's policy task forces might be used as a justification for delaying rate hikes is also highlighted by Bank of America. His reaffirmation that short-term interest rates remain the predominant tool for achieving the Fed's dual mandate suggests he does not view balance sheet reduction as a substitute for rate hikes.

Bank of America says it has long forecast a September hike and feels more confident in that call following the speech, though it is not yet declaring victory. The bank notes that talk is cheap and cautions that Warsh's emphasis on judging trends rather than isolated data points now puts the onus on him to follow through with a September hike unless the upcoming August jobs and inflation data come in very soft.