BofA: Warsh's Jackson Hole remarks pave way for September rate hike

According to Bank of America, Kevin Warsh's speech at Jackson Hole has limited his own flexibility, making a September rate increase much more likely unless incoming economic data — rather than further comments — becomes the decisive factor for that meeting. If the bank's assessment is correct, any decision to hold rates steady would undermine the credibility Warsh built with his Friday address, leaving markets to treat the September choice as roughly a 50-50 bet that hinges on August employment and inflation figures, not a predetermined hawkish or dovish outcome.

Warsh's clarification that he is concentrating on core PCE, especially the portion of the consumption basket growing at an annual rate above 3 percent, offers traders a clearer lens for evaluating upcoming inflation data compared with his more vague July remarks, which might lessen some of the volatility tied to individual data points. His statement that short-term interest rates remain the main policy instrument, with balance sheet reduction acting as a secondary tool rather than a replacement for rate increases, also indicates that quantitative tightening is unlikely to be used to ease the impact of a rate rise, keeping near-term policy discussions focused on the rate path.

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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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Bank of America believes Warsh has essentially locked himself into a September rate increase unless the data turns unusually weak.

Summary:

• Bank of America argues that Warsh's Jackson Hole speech resolved ambiguity from his July press conference regarding his preferred inflation measure, by stating he is focused on achieving 2% PCE inflation.
• Warsh outlined his view on underlying inflation, pointing out that 54% of goods and services in the PCE basket are increasing at an annual rate above 3%, a proportion much larger than before the pandemic.
• Warsh noted that the Fed's policy task forces will not influence near-term rate decisions, pushing back against the notion they would be used to delay a hike.
• He reiterated that short-term interest rates are the main tool for the Fed's dual mandate, while still drawing attention to central bank money creation, which BofA interprets as him remaining a balance sheet hawk.
• BofA says Warsh's focus on trends rather than single data points now puts pressure on him to deliver a September hike unless August jobs and inflation data are very weak, or risk losing the credibility gained from his speech.
• BofA notes it has long predicted a September hike and feels more confident in that forecast after the speech, though it is not yet claiming victory.

Bank of America stated that Federal Reserve Chairman Kevin Warsh's Jackson Hole address tackled several major market concerns about his policy direction and now leaves him with little leeway to avoid a September rate increase. In a client note, the bank said the key insight was Warsh's confirmation that he is targeting PCE inflation to return to 2 percent, a shift from his July press conference comments that the bank said had created confusion over which inflation metric he favoured.

BofA reports that Warsh also provided fresh detail on how he assesses underlying inflation, saying that 54 percent of goods and services in the PCE basket are currently rising at a year-on-year pace above 3 percent, a figure he described as significantly higher than pre-pandemic levels. The bank does not see this as a rigid guideline for policy, but it offers considerably more openness than Warsh has previously shown about how he distinguishes persistent inflation pressure from temporary shocks, and the conclusion he reached from those numbers was strongly hawkish.

BofA also emphasized Warsh's rejection of the idea that the Fed's policy task forces could justify delaying rate increases, pointing out his statement that their recommendations will not affect near-term decisions. The bank said Warsh's restatement that short-term interest rates remain the primary tool for the Fed's dual mandate suggests he does not see balance sheet reduction as a replacement for rate hikes, although his reference to monitoring central bank money creation signals he remains hawkish on the balance sheet.

BofA said it found the speech encouraging but warned that talk is cheap, arguing that Warsh's focus on evaluating trends rather than individual data points, along with his view that underlying inflation has not improved significantly in recent months, places the burden on him to proceed with a September hike unless August jobs and inflation reports are very weak. The bank said that failing to do so would probably cost him the credibility his remarks created. BofA added that it has long expected a September rate increase and, while not yet claiming certain victory, feels more assured in that view after Warsh's Jackson Hole appearance.