U.S. Federal Reserve Chairman Kevin Warsh walks through the halls of the Kansas City Federal Reserve’s Jackson Hole Economic Policy Symposium on Friday, August 28, 2026 in Moran, Wyoming, USA.
David Paul Morris | Bloomberg | Getty Images
A few carefully chosen words from Federal Reserve Chairman Kevin Warsh convinced markets that he was serious about inflation and was prepared to recommend a rate hike in just a few weeks.
But the path in that direction remains messy, and there is still plenty of incentive to convince Mr. Warsh and his fellow central bank policymakers that the move isn’t necessary just yet.
On Friday, the market reversed its interest rate expectations following Mr. Warsh’s keynote speech at the Fed’s annual symposium in Jackson Hole, Wyoming. It had previously predicted there was little chance of a rate hike until at least December. The probability then changed to more likely to be 1 when the Federal Open Market Committee meets a little more than two weeks later.
But some officials warned that the hype about rate hikes was unwarranted.
“I believe we are in a supply shock, but traditionally you don’t get into a supply shock unless you see second- and third-order effects,” Treasury Secretary Scott Bessent told CNBC in an interview Monday at the Group of 20 Summit in Asheville, North Carolina. “And we see core inflation remaining very, very subdued.”
Warsh acknowledged that recent inflation data had been soft, but said there had not been enough progress and “we cannot say that the underlying trend has improved in any meaningful way.”
“We have to be confident that underlying inflation is moving clearly and fast enough toward our goals. If not, we have work to do,” he said.
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Taken together, his comments have sharply increased the likelihood of a rate hike. The odds of action at the Sept. 15-16 meeting rose to 66.1% on Monday, nearly twice as high as before Warsh’s remarks, according to CME Group’s FedWatch.
But Mr. Warsh has been harsh in the past about the Fed’s inflation mandate, without much guidance on what he considers an appropriate response. At a press conference in July, he vowed that the Fed would be “unwavering” in its pursuit of 2% inflation. But markets saw his commitment as less than full-strength, sending Treasury yields higher and reducing the chances of a rate hike.
Indeed, the chairman’s comments Friday were “relatively uncontroversial and are reiterated every time Mr. Warsh makes them,” Citigroup economist Andrew Hollenhorst wrote in a note to clients.
Hollenhorst characterized Warsh’s comments as “but only slightly” more hawkish than usual and came amid economic data that showed there was no particularly urgent need for monetary policy tightening.
The economist predicted that “no consensus on raising interest rates could be reached at the FOMC meeting in July.” “Data since then points to slower inflation and softening employment. There will be no consensus on a rate hike in September. Our expectation that inflation data will continue to cool makes a rate hike unlikely this year.”
The Fed has several important data points to consider before its next meeting.
Important employment data is due to be released this week, raising questions about the labor market after a third consecutive year of weak non-farm payrolls. Next week, just before the Fed meeting, the Consumer Price Index and Producer Price Index will be released, both of which are reflected in the central bank’s main inflation measure, the Consumer Expenditure Price Index.
PCE inflation for July showed a headline rate of 3.7% and a core rate of 3.3%. The Dallas Fed’s policy of removing the extremes on both ends remained at 2.3%, much closer to the Fed’s goal.
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Several housing-related reports are also expected to be released on the day of the Fed’s interest rate decision, along with retail sales figures.
David Kelly, chief global strategist at JPMorgan Asset Management, said the most important of these is the employment situation, which could deter the Fed from raising interest rates. Recent data shows “the economy is not as strong as Kevin Warsh suggested in his Jackson Hole speech,” Kelly said in his weekly market note.
“Given this, it may have been premature for the market to assume a 60% chance of a rate hike in September. Investors should be prepared for the possibility of a policy error, but there is little in the labor market to suggest future inflation problems,” he added.
But markets expressed confidence that the Warsh Fed was ready to act after three out of 12 FOMC voters supported raising rates in July.
Meanwhile, Bank of America said Warsh’s Jackson Hole speech showed the market “more confidence in the Fed,” and it is sticking by its call for three more interest rate hikes.
“The important takeaway for us is that Mr. Warsh has raised the bar for patience by arguing that the Fed should focus on trends rather than ‘isolated data points’ and that underlying inflation has not ‘meaningfully improved,'” Bank of America economist Aditya Bhave said in a note.
“Barring a significant downside surprise, the onus is on Warsh to raise rates (in September),” he added. “Otherwise, we think we risk losing some of the credibility that we earned on Friday.”
