Trump-appointed Federal Reserve Chairman Kevin Warsh made it clear during his Friday speech in Jackson Hole that interest rates could be raised this year if inflation does not stabilize quickly enough.
Kevin said the summer inflation figures were lower than expected, but this is not enough to show that the overall trend has changed. "While the summer [inflation] figures were better than expected, they do not tell me that the underlying trends have improved significantly." Inflation is too high for the Fed to ease its policy for now.
Kevin stated that the central bank needs evidence that inflation is approaching the 2% target quickly enough. "We need to be confident that core inflation is moving towards our target clearly and at a sufficient pace. Otherwise, we have much more work to do. This is our task, our mandate, and our duty," he said.
Data from CME Group (NASDAQ: CME) showed that traders raised the probability of an interest rate hike in September to 55.7%, about 20 percentage points higher than on Thursday. The Federal Reserve will announce its next decision on September 16.
Kevin continues to prioritize inflation as markets price in another rate hike
Heather Long, Chief Economist at Navy Federal Credit Union, stated that Kevin "opened the door for a Fed rate hike. The hike likely won't happen in September, but it will certainly happen by October or December."
Heather added: "Warsh explicitly stated that the encouraging inflation figures this summer do not indicate a 'substantial' improvement in inflation. The bond market reacted quickly, pricing in an interest rate hike."
Kevin also stated that markets still believe the Fed will get prices under control. "Market prices show confidence that we will ensure price stability. And I can assure you, they are right." He said inflation must remain a priority for the Fed, calling the economy "strengthened."
He cited AI as one reason for growth, explaining that people and companies continue to spend money. Although hiring rates have slowed, he explained this by saying the labor force is no longer growing at the previous pace.
Kevin's prepared comments showed how he believes the Fed should conduct policy. Kevin did not outline an interest rate trajectory or provide markets with data that would prompt the central bank to act. "Today I stand here, committed to discipline, not decision-making," he said before the Federal Open Market Committee representatives, economists, and journalists.
Kevin is criticized for being restrained in providing policy signals as long as inflation exceeds the target level.
Kevin spoke against the concept of "predicting the future," stating that the market should pay attention to the numbers rather than wait for hints from the Federal Reserve. In his speech titled "In Our Time," Kevin noted: "You can call it a plan, you can call it a roadmap, but do not call it predicting the future."
Stocks, bonds, gold, and Bitcoin fall as Kevin leaves open possibility of another rate hike this year
Traders working with Kevin Kalshi changed their bets after his speech. The market priced the probability of a 25 basis point hike at 48%. Before Kevin's speech, nearly 70% expected no change in September. Treasury yields rose. The yield on two-year bonds, responsive to Fed expectations, climbed to its highest level since late July.
On Friday, Wall Street ended trading lower, despite the major indices finishing the week with gains. The S&P 500 index fell 0.25% to 7,711.76. The Nasdaq Composite index lost 0.52% to 26,402.42 amid weakness in chipmaker stocks, including Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTC).
The Dow Jones Industrial Average declined 9.45 points, or 0.02%, to 53,559.99. For the week, the S&P 500 rose 0.5%, the Nasdaq gained 0.9%, and the Dow Jones rose 0.5%, marking its first weekly gain in three weeks.
The price of gold also declined. Spot prices fell below $4,500 per ounce after Kevin stated that price stability had become the "primary task" for the Fed. Inflation still exceeds 2% five years after the surge that took it beyond the central bank's target.
Bitcoin fell by $3,000 in about 60 minutes as traders reacted to expectations of an interest rate hike. The drop liquidated approximately $200 million in leveraged long positions, leading to forced selling.
