Kevin Warsh will have something to say in his first appearance at Jackson Hole tomorrow. The first challenge is inflation, which has been too close to 4% for months. But with the new Federal Reserve chairman chosen by Donald Trump, the credibility and independence of the American central bank are also at stake. Meanwhile, the examination of Warsh’s strategies and, even more so, his external communication has already begun.
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“It is clear that Warsh prefers to say less rather than too much,” explains Anwiti Bahuguna, co-head of investments at Northern Trust Asset Management. “However, the markets’ request for a certain degree of transparency and communication on the reasons for the current orientation and the interpretation of the situation is legitimate,” she adds.
Markets are waiting to understand; they are not asking for previews but for information, perhaps reassurance. And so far, on the contrary, Warsh’s reluctance to provide answers has ended up creating a lot of confusion. “In July, Warsh was unable, or unwilling, to even explain the decision not to intervene on rates, despite being explicitly asked. He did not make it clear what he thinks about raising rates as a tool to contain inflation at this stage. It was a disconcerting behavior,” says Robert Tetlow, former senior advisor for monetary policy at the Fed. The bankers’ summit in Jackson Hole, Wyoming, can offer Warsh the opportunity to regain balance on forward guidance and also in his leadership.
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Inflation data, published yesterday by the Commerce Department, slightly increased pressure on the Fed for a reference rate hike. After the decline in recent months, the PCE index showed an unexpected persistence of inflation: the Fed’s preferred indicator for its analyses reported a 3.7% increase in personal consumption expenditure prices in July compared to the same month last year. The monthly figure also exceeded expectations, settling at 0.2% in July after a 0.1% drop in June. Excluding energy and food prices, the so-called core PCE remained stable at 3.3% year-on-year, while rising to 0.2% month-on-month, after 0.1% in June.
Following the report’s publication, Federal funds futures indicated approximately a 42% probability of a rate hike at the Fed’s next meeting on September 15-16, compared to about 36% recorded just before the data release. This comes after the Fed voted last month – by a majority with three dissenting votes among the twelve FOMC members – to keep the reference rate unchanged in the range between 3.50% and 3.75%.
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