Will Warsh's Jackson Hole speech be a course correction or detour?

Federal Reserve Chairman Kevin Warsh will address an audience of international economists and central bankers on Friday, with investors globally watching for him to offer more details about the economy, recent volatility in bond markets, and the risks facing the US and global outlooks. Warsh's speech at the US central bank's high-profile economic symposium ??in Jackson Hole, Wyoming, has emerged as an important test just three months into his tenure as Fed chief. At issue is whether he can maintain his less-is-better approach to monetary policy communications or feels compelled to provide at least a rough roadmap of how he views elevated inflation and - critically - what might prompt him to conclude that higher interest rates are needed to contain it. It's a question other Fed policymakers have been willing to discuss publicly, often in blunt terms. That more open approach has been the norm in ‌an era of greater central bank transparency, with Warsh's reluctance to delve too deeply into the details seen as a ​missing element. Hours before the conference's opening dinner on Thursday night, some of Warsh's colleagues laid out ​the case for why rates might need to rise, including Kansas City Fed President Jeffrey Schmid, the host of the Jackson Hole event. "I don't know what we're restricting currently with the rate policy that we're at today," he said ​in a CNBC interview, indicating he feels the Fed's current policy rate, fixed in the 3.50%-3.75% range since December, is not holding back spending and investment as it would need to do to slow inflation. Inflation is "still stubborn and it's still sticky and we've got to continue to find ways to break through," he said.

 

 "Now is the time to act," Cleveland Fed President Beth Hammack said in a separate CNBC interview, while Boston Fed President Susan Collins was more tempered. In an interview with Reuters, Collins said recent inflation data was "mixed," with headline inflation remaining too high but the details showing some more promising signs, and the need for a rate hike still an open question.

 

'Inflation is job one'

Discussion of a possible quarter-percentage-point rate hike may seem trivial ​in terms of any immediate influence on the economy, whose growth outlook appeared to brighten this week after the release of solid data for consumer spending and durable goods orders in July. 

But Warsh at this point needs to make clear he is willing to do what's needed ‌if inflation remains stalled significantly above the Fed's 2% target or begins to rise again, said Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England's policymaking ​committee.

 "What he should do is quote himself from previous speeches, press conferences, confirmation hearings: 'Inflation is job one. A number of my colleagues on the (Federal Open Market) Committee have raised concerns. I think these concerns are legitimate, and we will not fail to act in the near term,'" Posen said. Posen said such a stance would allow Warsh to be blunt about his willingness to raise rates, if needed, without abandoning his prior statements that he believes rising productivity and other factors will help keep inflation low over time. Warsh is scheduled to begin speaking at ‌10 a.m. EDT (1400 GMT) in a keynote address kicking off two days of discussion at a forum that ​has evolved over nearly half a century into a premier setting for central bank debate and economic research. The ‌topic this year is financial innovation, but as in most years the sidebar and dinner discussions are likely to be focused elsewhere: On Warsh and, in particular, the emerging question of whether Treasury Secretary Scott Bessent's recent intervention in the ‌bond ??market signals difficulties ahead for the Fed leader. In the extreme, the needs of monetary policy to temper inflation with rate hikes could conflict with the management of the $40 trillion in outstanding US public debt and President Donald Trump's desire to ​borrow the money to finance it as cheaply as possible.

 Global central bankers, always a healthy contingent at Jackson Hole, have their own interests at stake, since the Fed's interest rate decisions influence currency values, inflation, and interest rates worldwide.

 

Guidance versus reaction function

Warsh's reticence to provide guidance on coming policy decisions is by design. Even some of his Fed colleagues agree it is unwise to ​lean too heavily towards any particular outcome and risk setting expectations that later have to be changed because of an evolving economy. Recent inflation data has shown little improvement. The Personal Consumption Expenditures Price Index, the measure used by the Fed to set its inflation target, remained steady but well above target at 3.7% in July. But the strength of the job market remains a question mark; some economists expect consumer spending to ‌weaken and temper economic growth and prices; and others think the current pressure on inflation from tariffs and oil prices could ease and push inflation lower. 

In an essay earlier this week, International Monetary Fund Financial Counsellor Tobias Adrian said the use of ‌forward guidance to make commitments about interest rates "can become costly in an environment marred by supply shocks" that quickly change the outlook and the policy response.

 But he also drew a distinction with guidance that outlines how policymakers view coming risks or scenarios, and how they would likely react as data show what path the economy is following - elements of public understanding he argued were essential for effective central banking.

 "They still need to explain which data matter, specifically, and how such data affect their policy decisions," Adrian wrote. "Reaction functions rarely imply a straightforward formula, as central banks tend to avoid mechanical rules. Judgment remains indispensable. Yet qualitative reaction function communication is foundational for these institutions' credibility and accountability." That's an area where some observers feel Warsh has fallen short, and are looking to his speech on ​Friday for ‌a possible fix.