Written by: Gao Zhimou
Fed Chair Kevin Warsch, making his first Jackson Hole appearance as chair, sounded more hawkish than at the July FOMC press conference: inflation is "worrying", the Fed's current "foremost focus should be on prices", and if underlying inflation trends don't fall back toward target with "sufficient speed", "we have more work to do".
Following the remarks, the 2-year Treasury yield jumped about 7 basis points – one of the largest market reactions to a Jackson Hole speech in recent years. Meanwhile, the probability of a September rate hike climbed from about 30% before the speech to over 50%.
However, two major Wall Street banks did not pivot with the market pricing. JPMorgan maintained its baseline forecast for a December hike, with economist Michael Feroli stating that the "more important news" for the September meeting outcome will be the upcoming August nonfarm payrolls and CPI reports. Goldman Sachs expects both August core CPI and core PCE to rise around 0.2% month-on-month; on that path, the FOMC would hold steady.
Inflation is the "Foremost Concern": Underlying Trend Shows No Substantial Improvement
Warsch devoted a significant portion of his speech to inflation. While acknowledging that this summer's PCE and CPI readings were "better than expected", he pivoted: "That doesn't tell me the underlying trend has improved in a substantial way."
He presented data to support this: over the past 12 months, the proportion of goods and services in the PCE basket with price increases exceeding 3% reached 54%, down from the post-pandemic peak of around 77%, but still well above the pre-pandemic twenty-year average of 32%. JPMorgan's Feroli noted that compared to the trimmed-mean PCE Warsch has cited previously, this metric choice is "less cherry-picked" – the trimmed mean has returned to normal range, but the share above 3% remains far above pre-financial crisis levels. Goldman Sachs pointed out that this calculation reflects some tariff effects.
Warsch acknowledged wage growth is "moderate", but stated that wages "have for a long time not been a reliable indicator of future inflation" – implying that moderate wage data does not constitute strong evidence of an improved inflation outlook.
Correcting Two Controversial July Statements
In his speech, Warsch proactively corrected two statements from the July FOMC press conference that had unsettled markets.
He had previously cast some doubt on the future of the 2% inflation target, but this time explicitly stated: "There should be no misunderstanding – the Federal Reserve’s 2% price stability objective, measured by the PCE price index, is a fixed, unwavering target." Similarly, after being vague about policy tool choices before, he confirmed that "short-term interest rates are the primary tool for achieving the dual mandate." JPMorgan commented that taken together, the two clarifications send a clear signal – higher inflation will be met with a higher federal funds rate.
Warsch also outlined seven principles guiding policy, reiterated his focus on monetary aggregates, questioned the role of forward guidance in normal times, and concluded by calling for a "quieter, more intentional Fed on communications". JPMorgan noted this was the longest Jackson Hole speech by a Fed chair since 2018.
Economy "Impressive", Financial Conditions "Hard to Describe as Restrictive"
Warsch spent about a quarter of his speech discussing economic conditions in a fairly traditional tone. JPMorgan said this part "sounded like a classic technocratic Fed chair speech", such as discussing metrics like private domestic final purchases.
His assessment of the economy was "impressive, the economy appears to have gained strength": real consumer spending is "healthy despite shocks", and business capital expenditure is "growing briskly" – more than half of the growth in capex this year is attributable to AI-related construction. He cited private domestic final purchases growth approaching 3% this year, though Goldman noted this metric is currently distorted upward by imports of tech goods related to AI investment.
On the labor market, Warsch deemed it "quite stable", "consistent with full employment", with the unemployment rate "still low by historical standards". His overall judgment: "It's hard to describe broad financial conditions today as restrictive" – a clear shift from his stance at the June press conference, where he deferred the same question to his staff.
Goldman Sachs, JPMorgan: September Hike Still Not the Base Case
Warsch revealed in his speech that at the July FOMC meeting, "I and most of my colleagues thought it wiser to wait for new information over the intermeeting period before deciding whether an adjustment to interest rate policy was warranted."
JPMorgan maintained its December hike forecast. Feroli acknowledged that given the increasing number of Fed officials signaling hawkishness, moving earlier "would not be unreasonable", but the key variable is the August jobs and CPI data.
Goldman's assessment was more definitive: a September hike would only be possible if August CPI and PPI data come in unexpectedly strong. The bank expects core inflation to rise around 0.2% month-on-month in August, making it likely the FOMC stays on hold.
