KEVIN WARSH DELIVERS HIS MAIDEN ADDRESS AT JACKSON HOLE

KEVIN WARSH DELIVERS HIS MAIDEN ADDRESS AT JACKSON HOLE

It was a highly anticipated speech as the Fed chair, Kevin Warsh, was to address the Jackson Hole Symposium for the first time. Jackson Hole has always been the forum where global central bank heads have provided their outlook on monetary policy. In 2024 and 2025, the previous Fed chair, Jerome Powell, had clearly hinted at rate cuts to soothe the job market. Accordingly, rates had been cut by 175 basis points.

Kevin Warsh is heading the Fed at a time when inflation is rampant and the uncertainty in the Middle East is adding to domestic costs. For quite some time, there have been expectations that the Fed will hike rates, but it has chosen to remain neutral. The US 10-Year bond yields have already spiked to above 4.7%, while the 30-year bond yields are above 5.2%. The market seems to expect a rate hike, so the Fed guidance at Jackson Hole was going to be the one big event. Warsh, however, had a different take on guidance.

AVERSE TO FED OFFERING MACRO GUIDANCE

Over the last few months, one thing has emerged clearly. Kevin Warsh is averse to giving forward guidance; either on rates or on macros. In the quarterly projection of macros, while all other FOMC members provided macro guidance, Warsh excused himself from providing any guidance. He has also shortened the Fed statement and the minutes to make it more “matter-of-fact” and focus less on the forward guidance. There is a reason he does cite.

According to Warsh, forward guidance on rates and macros was a product of the global financial crisis (GFC) of 2008. At that point, forward guidance was essential to give comfort to the markets and to people at large. However, over the last 18 years things had changed substantially. As Kevin Warsh himself said at Jackson Hole, “forward guidance had outlived its utility.” As for Warsh, he remains uncomfortable about early pronouncements of future policy direction. Too much transparency in communication may not be a virtue.

In his speech at Jackson Hole, Kevin Warsh emphasized that unlimited forward guidance can lead to ambiguity instead of clarity. Quite often, transparency on policy deliberations leads to FOMC members getting committed to future decisions. That inhibits the freedom of FOMC members to make the right calls at the right time. While the Fed will continue to be proactive, it will continue to be guided by data inflows rather than committing to views.

KEY PRINCIPLES OF MONETARY POLICY FORMULATION

In his speech, Kevin Warsh outlined some key principles underlying Fed policy.

The Fed policy objective of PCE inflation at 2.0% is sacrosanct. The primary objective of the Fed remains price stability. Also, inflation is not mean-reverting, so Fed will always take the role of bringing inflation to the target.

Fed has additional responsibility to ensure full employment. Contrary to popular belief, full employment is not antithetical to price stability. High inflation does eventually impact growth and job opportunities too.

The most important tool that the Fed will use is short-term interest rates to ensure the twin objectives of price stability and full employment. He also underlined that spurring GDP growth is not the job of the Fed, except in times of an extreme economic crisis.

An important point made by Warsh is about currency creation by the central bank. He underlined that amount of money in the system makes a big difference to inflation, and the best way to contain inflation is to keep checks on money supply and borrowings.

Finally, an additional principle that Warsh has inserted is that the markets will see a quieter Fed, not too keen to pamper the analysts with guidance. However, the Fed will be a lot more purposeful in its communication.

More measured communication appears to be the big shift under Kevin Warsh.

KEY MACRO TAKEAWAYS FROM KEVIN WARSH SPEECH

Here are some key macro takeaways from the speech delivered at Jackson Hole.

While labour markets were stable and output was robust, the big concern was inflation at 3.7%, a full 170 bps above target. This is the first official acknowledgement by the Fed chief that the Fed needs to do something about inflation.

Business capex has been rising rapidly, which is a good lead indicator of future output growth. He also added that more than 50% of the growth in capex can be attributed to AI, which is redefining US industry.

For companies in the S&P 500, profits growth has been above 20%, largely led by tech sector gains. Even the profit margins were at the highest in memory. On stock markets, the volatility had come down substantially.

Kevin Warsh also added that real consumer spending remained healthy despite the shocks; up nearly 2% over the last 4 quarters. Even the private domestic final purchases (PDFP) had risen by 3% in the current year. As a signal, it is a strong lead indicator of a pick-up in future GDP growth.

The big concern for the Fed remains inflation and that came out clearly in the speech.

CONCLUDING REMARKS FOCUSED ON REINING IN INFLATION

According to Warsh, the concern is that US inflation had been above the 2% mark for 65 months in a row, and that was clearly a problem. From the Fed standpoint, there must be clarity that the inflation is proceeding towards its 2% target. He however added that progress on reining inflation had been limited. According to Warsh, 54% of items in the PCE Inflation basket were above 3%. That is much higher than the historical average of 32%, which is the comparison that really matters to inflation policy.

As Kevin Warsh summed up the stand of the Fed in his speech; It will be a commitment to a discipline and not to a decision. Sound monetary policy is not only essential for orderly growth of the economy, but gives greater confidence to households!