I. The Fed
Today's Financial Times ran an exclusive story about Fed Chair Kevin Warsh. It is based on insights provided by unidentified people close to him. They say that he admits that he has made some mistakes, "including failing to reinforce his key messages on price stability." In our opinion, he has been unequivocal about his commitment to restore price stability. He just hasn't done anything about it so far. Nor has he provided any information about the Fed's reaction function under his leadership.
The FT article suggests he is watching "market-based measures of inflation," which remain low. Furthermore, the article states, "[b]y breaking the feedback loop between the Fed and investors, the new chair has said that he hopes markets will spend less time scrutinising officials’ clues and focus more on economic data." We've been monitoring the 2-year Treasury yield, which is unambiguously calling for rate hikes.
Warsh is refusing to provide any forward guidance, but his people are providing some, saying that he is "prepared to raise interest rates at September’s meeting if inflation readings released in coming weeks are hot." We thought that the Q2-2026 core GDP deflators for total GDP and for personal consumption expenditures were hot at 3.8% y/y and 3.3% (chart).
Will Warsh provide any more clarity in his Jackson Hole speech on Friday, August 28. We doubt it.
II. Macro
The September FOMC rate decision will ultimately hinge on the economic data. The latest reports point to a resilient economy, a tight labor market, and persistent inflation pressures. Consider the following:
