Author: Wall Street News
Federal Reserve Chairman Warsh's debut at the Jackson Hole symposium on Friday was widely interpreted by Wall Street as a hawkish "correction" of the July FOMC post-meeting communication.
Warsh's speech explicitly reiterated that the Fed's 2% inflation target is unwavering, argued that current overall financial conditions can hardly be described as restrictive, stated that recent positive PCE and CPI data are insufficient to prove a substantial improvement in underlying inflation trends, and bluntly said that if the Fed cannot be confident that inflation is falling at a "clear and fast enough" pace, it "has more work to do." Reuters noted this was Warsh's closest admission yet that rate hikes may be necessary.
Warsh's remarks swiftly shifted Wall Street's focus for the September FOMC meeting. Priya Misra, an investment professional at J.P. Morgan Asset Management, called it a "hawkish speech," arguing Warsh was strongly reaffirming the Fed's commitment to price stability and seeing it as a "clean-up" of the "communication misstep" from the July press conference; Matthew Amis, Investment Director at Aberdeen, warned that if the Fed does not hike in September, its credibility may be dealt another blow.
Both Barclays and Societe Generale adjusted their Fed policy forecasts based on Warsh's speech at the Jackson Hole symposium, now expecting the Fed to raise rates by 25 basis points each at its September and December meetings. SocGen also forecasts another hike in March.
Wells Fargo, Fidelis Capital, and others believe Warsh's speech left enough room for a near-term rate hike, although some institutions argue he still did not provide a clear policy path for action in September.
The observations of journalist Nick Timiraos, dubbed the "new Fed whisperer," precisely pinpoint the core of this debate: Warsh believes financial conditions are not restrictive, and recent inflation data improvements have not convinced him the underlying trend has shown "meaningful improvement," yet he still did not provide a specific policy path nor explicitly state whether he supports a September hike. Timiraos summarized Warsh's speech as: the Fed may not yet be done fighting inflation.
Thus, the market faces a more hawkish policy diagnosis but still lacks a clear "reaction function." CME data shows that after Warsh's speech, the probability of a September rate hike rose from about 35% before the speech to about 50%; other market data briefly showed the probability further rising to around 60%.
Hawkish Speech Repairs Anti-Inflation Credibility
First and foremost, Warsh's speech achieved a "correction" at the policy communication level.
J.P. Morgan Asset Management's Priya Misra's assessment of Warsh's speech was very direct:
"This was a hawkish speech."
She believes Warsh was "forcefully signaling" policymakers' commitment to price stability. Misra focused more on the relationship between this speech and the communication following the July FOMC meeting. She called it a forceful response to the "communication misstep" at the July press conference:
"This was a forceful response to what I believe was a miscommunication at the July press conference."
She even termed it a "clean-up act," a sort of "corrective cleanup" of the July communication.
This point was echoed by other institutional figures.
Christopher Hodge, Chief US Economist at Natixis, believes Warsh's speech was a "clear improvement" over the July press conference, arguing that the market had previously underestimated the likelihood of Fed rate hikes, and pricing is now more reasonable.
Hodge believes that by directly acknowledging the inflation issue, reiterating the clear 2% target, and assuming the Fed's institutional responsibility on inflation, Warsh strengthened his anti-inflation credibility.
Nationwide Chief Market Strategist Mark Hackett believes Warsh successfully achieved his goal: to convey his stance to the market without significantly disrupting it.
Hackett pointed out that there was a market misjudgment that the 2% inflation target might have softened, but Warsh has now clearly told the market this will not happen.
"He was reaffirming a hawkish stance in a more consistent, rather than suddenly escalated, way."
Hackett even summarized it as:
Don't expect rate cuts soon, be prepared for hikes.
"New Fed Whisperer" Identifies Key Points: Financial Conditions Not Restrictive, Inflation Improvement Still Insufficient
Timiraos's summary of Warsh's speech focuses more on the policy judgments themselves.
He notes that Warsh believes overall financial conditions are not restrictive, with credit and lending markets showing few signs of significant constraint; meanwhile, recent positive inflation data have not convinced Warsh the underlying trend has improved.
Warsh's exact words were:
"I find it difficult to characterize overall financial conditions as restrictive."
Regarding recent inflation data, Warsh stated:
"Although PCE and CPI data this summer have been better than expected, this does not lead me to believe the underlying trend has shown meaningful improvement."
Timiraos highlighted this sentence both in his report and on social media.
In his view, this means the market cannot assume Warsh has shifted to a more dovish policy stance just because inflation data in recent months have been better than expected. Warsh is truly focused on whether the underlying inflation trend is moving toward the 2% target in a sustained and fast enough manner.
Warsh Gives a Compass, Not a GPS
Another distinct feature of Warsh's speech was this: He clearly told the market his policy principles but refused to provide a specific policy reaction function.
Nathan Shetty, Chief Investment Officer at SEI Investments, believes that by explicitly reiterating the firm 2% PCE target, the speech can only be interpreted as more hawkish.
However, Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management, notes that Warsh did not disclose the Fed's reaction function, so the market remains in the "black box."
Warsh himself explained that over-disclosing the reaction function could potentially tie the Fed's hands, much like over-reliance on forward guidance in 2021.
Hazen believes this means Warsh wants the Fed to retain greater flexibility in responding to economic changes, but the market may not appreciate this approach.
Peter Andersen, Founder of Andersen Capital, used a vivid analogy:
Investors want a GPS, but the Fed is giving a compass.
In his view, investors hoped Warsh would detail the economic outlook and policy path, but Warsh is essentially telling the market: the new Fed will not provide as much forward guidance as past chairs did, and the market must adapt to this "new regime."
"If There's No Hike in September, Credibility Takes Another Punch": Wall Street Begins Repricing Near-Term Action
For the market, the most important change remains that a September rate hike has re-entered core discussions from a marginal scenario.
Aberdeen's Investment Director Matthew Amis believes Warsh's speech set up a key scenario for the September meeting:
"If they don't hike, credibility takes another punch."
This statement essentially links Warsh's anti-inflation stance to September policy action: since Warsh clearly stated underlying inflation must fall fast enough, otherwise the Fed "has more work to do," then if future data does not show clear improvement and September still sees no action, the market may question the substance of the Fed's previous hawkish rhetoric.
Gary Schlossberg, Global Strategist at Wells Fargo Investment Institute, also believes that although Warsh did not say it directly, "connecting the dots" essentially signals at least one more hike, possibly even more.
He said that unless inflation clearly retreats—which he does not expect—inflationary pressures could even increase over the next 6 to 8 months. Even without a September hike, he believes the Fed is likely to act earlier in the year.
Chris Gunster, Head of Fixed Income at Fidelis Capital, explicitly stated that the market now sees the probability of a September hike exceeding 50%.
He believes the factors Warsh mentioned—inflation still above target, a robust labor market, resilient economic performance—collectively give the Fed policy space for a near-term hike.
Barclays and SocGen Forecast Hikes in September and December
Both Barclays and Societe Generale forecast the Fed will raise rates by 25 basis points each at its September and December meetings.
Barclays' forecast in mid-June was to "keep rates on hold indefinitely."
Following Warsh's speech on Friday, Barclays Chief US Economist Marc Giannoni and Senior Economist Jonathan Millar wrote in a report: "We expect most FOMC members to align with Warsh's stance and hike by 25bps in September, citing insufficient progress on inflation."
These economists expect "another 25bp hike in December, bringing the target range for the federal funds rate to 4.00%-4.25%, as there is almost no progress in year-on-year inflation for the remainder of this year."
Jan Groen, Chief US Economist at Societe Generale, said in a report: "Persistently sticky core inflation and the Fed's increasingly explicit concerns about high inflation indicate the bar for keeping rates on hold is rising."
Although SocGen forecasts another Fed hike in March, Groen wrote in the report that a March hike "faces significant uncertainty and may not materialize."
"Short End Says Hike, Long End More Relaxed": Market Turns Warsh's Diagnosis into Trades
The Treasury market reacted swiftly after Warsh's speech, especially at the short end.
Reuters reported that the two-year Treasury yield rose as much as 11 basis points to 4.34%, hitting a one-month high; the 10-year yield rose 5 basis points to 4.72%, while the 30-year yield increase was significantly smaller.
This performance itself is a market interpretation of Warsh's speech: traders are raising pricing for near-term policy rate increases.
Michael Rosen believes the decline in short-term Treasuries and rise in long-term Treasuries reflects the market reassessing the Fed's policy direction—a Fed that views inflation as the primary problem implies short-term rates may still go higher.
Fidelis Capital's Gunster similarly noted that rising short-end yields and falling long-end yields, leading to a flatter yield curve, aligns with the market starting to bet on Fed rate hikes.
However, this market reaction does not mean Wall Street has formed a consensus that "September must see a hike."
Peter Cardillo, Chief Market Economist at Spartan Capital, believes the Fed may not act in September.
He argues that Warsh has acknowledged summer inflation data improved, just still "not convincing enough," so the Fed may want to observe September and October inflation data before deciding on action.
In other words, the market is repricing for hikes, but data remains the final threshold determining whether a September hike actually materializes.
Warsh Still Deliberately Rejects Forward Guidance "Said a Lot Without Substance"
Not all institutions believe Warsh's speech achieved a "thorough repair" in policy communication.
Eugene Epstein, Head of Trading and Structured Products at Moneycorp, believes that although the initial reaction to Warsh's speech was hawkish, substantive content remains limited.
His assessment was sharp:
"Warsh said a lot, but those words don't seem to have much substance."
Epstein believes Warsh has sent similar hawkish signals ahead of multiple FOMC meetings before, but policy action ultimately did not follow.
Therefore, he worries the market might again see a situation of being "initially moved by hawkish talk, then finding no actual policy change."
Jamie Cox, Managing Partner at Harris Financial Group, summarized this style as:
"Warsh said a lot, yet said nothing."
He believes Warsh is trying to walk a middle path, wanting to reassert anti-inflation credibility while unwilling to bind future policy through forward guidance.
This is precisely where the metaphor of "giving a compass, not a GPS" fits best: Warsh is willing to tell the market what kind of data would prompt the Fed to act, but not specifically which meeting will see action.
The Real Risk of "No Hike in September": Not the Policy Itself, But Credibility
Synthesizing Wall Street professionals' assessments, the most noteworthy aspect of Warsh's speech is not that he has promised a September hike, but that he re-established a more hawkish policy logic:
If employment remains robust, the economy remains resilient, and underlying inflation is not moving back to 2% fast enough, then current financial conditions may not be restrictive, and the Fed cannot rule out the possibility of further raising policy rates.
This is also why Amis believes that not hiking in September could potentially deal new damage to Fed credibility.
On the other hand, views from Cardillo, Epstein, and others also remind the market: hawkish communication does not equal a policy decision.
Warsh still adheres to the principle of "no forward guidance," not explicitly committing to a September hike nor providing a mechanical policy reaction function.
Therefore, a more accurate consensus forming on Wall Street might be:
Warsh has completed a hawkish correction of July's communication via his Jackson Hole speech; the probability of a September hike has significantly increased, but whether it ultimately materializes will still be determined by upcoming employment and inflation data.
For Warsh, the real policy test has also shifted from "does the market understand his speech" to a more direct question: if data does not show clear improvement, is he willing to actually translate this hawkish diagnosis into a rate hike in September.
