Warsh leaves Wall Street guessing

All eyes were on Kevin Warsh today as he took the stage at Jackson Hole for the Fed’s closely watched annual policy retreat. Investors were hoping for clues about what comes next for interest rates. What they got instead was a warning: Inflation is still too high, and the Fed isn’t counting on it to come down by itself.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do.”

Warsh is referring to the Fed’s 2% inflation target, as measured by the PCE index. Inflation has remained above that target since 2021, and headline PCE just climbed to 3.7% in July. “While this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” he said.

At the same time, the economy is looking pretty strong. Warsh said the US may be at a “hinge point in history,” pointing to booming business investment—particularly the AI infrastructure buildout—alongside strong corporate profits, resilient consumers, and a stable labor market.

Wall Street shrugs it off

Strong economy + high inflation = the Fed has room to keep rates high, or potentially raise them further. That hawkish equation pushed the odds of a September rate hike to 57.5%, from just over 30% earlier this week, according to CME FedWatch.

The 2-year Treasury yield jumped about 10 basis points following the speech, reflecting growing expectations for higher near-term rates. Longer-term yields, meanwhile, moved much less, suggesting investors see the inflation fight as more of a near-term policy problem than a dramatic shift in the economy’s long-run outlook.

Stocks remained unfazed: The S&P 500, Dow, and Nasdaq barely budged today, buoyed by lingering enthusiasm from Nvidia’s blowout earnings.

Fed up with guidance

Perhaps the bigger takeaway from Jackson Hole wasn’t what Warsh said about the next rate move, but his stated directive to…state very little.

For years, the Fed has relied heavily on forward guidance—signaling where policymakers expect rates to go so businesses, consumers, and investors can prepare in advance.

But Warsh wants to pull back that practice, arguing that while forward guidance was essential during the 2008 financial crisis, it has since “overstayed its welcome.” Warsh argues that giving markets too many clues can box policymakers into decisions before all the data is in, and create what he has described as a “hall-of-mirrors” problem, where the Fed reacts to markets that are themselves reacting to the Fed.

Instead, Warsh is pushing for a “quieter” Fed. That means fewer clues and more reliance on economic data for investors, potentially creating more volatility. “We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade,” Warsh said.

It makes for an ironic ending to the year’s biggest Fed gathering: Wall Street went to Jackson Hole looking for clarity, only to leave with more guessing to do.—SY