BofA says Warsh’s Jackson Hole speech raises pressure for September hike
BofA’s read suggests Warsh’s speech has narrowed his own room for manoeuvre, effectively raising the bar for anything other than a September hike and making incoming data, rather than further rhetoric, the key swing factor for the meeting. If the bank is right that a hold would cost Warsh the credibility he built with Friday’s remarks, then markets should treat the September decision as closer to a coin flip resting on the August jobs and inflation reports than a foregone hawkish or dovish outcome. The clarification that Warsh is focused on core PCE, and specifically on the share of the consumption basket running above 3 percent annually, gives traders a more concrete framework for parsing incoming inflation prints than his more ambiguous July comments provided, which could reduce some of the volatility around individual data surprises. His confirmation that short-term rates remain the primary policy tool, with balance sheet reduction as a secondary lever rather than a substitute for hikes, also suggests quantitative tightening is unlikely to be used to soften the blow of a rate increase, keeping the near-term policy debate focused squarely on the rate path itself.
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Earlier:
- Goldman Sachs still sees Fed on hold despite Warsh’s hawkish Jackson Hole tone
- New week, catch up time! Warsh’s hawkish Jackson Hole remarks lift rate hike odds, pressure stocks
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BofA says Warsh has effectively committed himself to a September hike unless the data turns unusually soft.
Summary:
- Bank of America says Warsh’s Jackson Hole speech clarified he is focused on delivering 2% PCE inflation, resolving ambiguity left by his July press conference comments on his preferred inflation measure.
- Warsh detailed his view of underlying inflation, noting 54% of goods and services in the PCE basket are running above 3% year-on-year, a far higher share than before the pandemic.
- Warsh said the Fed’s policy task forces will have no bearing on near-term rate decisions, pushing back on the idea he would use them to delay a hike.
- He reaffirmed that short-term interest rates remain the primary tool for achieving the Fed’s dual mandate, while still flagging attention to central bank money creation, which BofA reads as him remaining a balance sheet hawk.
- BofA says Warsh’s emphasis on tracking trends rather than isolated data points now puts the onus on him to deliver a September hike unless August jobs and inflation data come in very soft, or risk losing the credibility gained from the speech.
- BofA says it has long forecast a September hike and feels more confident in that call following the speech, though it is not yet declaring victory.
Bank of America says Federal Reserve Chairman Kevin Warsh’s Jackson Hole speech addressed several of the market’s biggest concerns about his policy approach, and now leaves him with little room to avoid delivering a rate hike in September. In a note to clients, the bank said the most important takeaway was Warsh’s clarification that he is focused on bringing PCE inflation back to 2 percent, a contrast with his July press conference remarks, which the bank said had muddied the waters on his preferred inflation gauge.
According to BofA, Warsh also offered new insight into how he thinks about underlying inflation, noting that 54 percent of goods and services in the PCE basket are currently running above 3 percent year-on-year, a share he said was far higher than before the pandemic. The bank said this does not amount to a strict rule for policy, but represents considerably more transparency than Warsh has previously offered about how he separates persistent inflation pressure from one-off shocks, and that the conclusion he drew from that data was firmly hawkish.
BofA also highlighted Warsh’s pushback against the idea that the Fed’s policy task forces might be used as a justification for delaying rate hikes, noting his comment that their recommendations will have no bearing on near-term decisions. The bank said Warsh’s reaffirmation that short-term interest rates remain the predominant tool for achieving the Fed’s dual mandate suggests he does not view balance sheet reduction as a substitute for rate hikes, even as his comment about paying attention to central bank money creation indicates he remains hawkish on the balance sheet as well.
BofA said it was encouraged by the speech but cautioned that talk is cheap, arguing that Warsh’s emphasis on judging trends rather than isolated data points, combined with his view that underlying inflation has not meaningfully improved in recent months, now puts the onus on him to follow through with a September hike unless the upcoming August jobs and inflation data come in very soft. Failing to do so, the bank said, would likely cost him the credibility his remarks gained. BofA said it has long called for a September hike and, while not yet declaring victory, feels more confident in that view following Warsh’s Jackson Hole appearance.
This article was written by Eamonn Sheridan at investinglive.com.