ROI-Warsh scored an easy win in Jackson Hole. The hard work starts now: McGeever

If financial markets’ reaction to Federal Reserve Chair Kevin Warsh's eagerly anticipated ​speech on Friday can be summed up in one word, it is "relief." But relief should not be mistaken ​for confidence. To regain that, he has much more work to do. Addressing the Kansas ‌City ​Fed's annual gathering of central bankers in Jackson Hole, Wyoming, last week, Warsh avowed his commitment to the Fed's 2% inflation target, clarified that the policy rate is the Fed's best tool to achieve that goal, and indicated a willingness to pull that lever should circumstances warrant.

The speech had a strong impact. Rates traders flipped to pricing in a roughly two-in-three chance of a September rate hike ‌from a one-in-three chance before the speech. Economists at Barclays, Societe Generale and Deutsche Bank are among those now penciling rate hikes in September and December. But although investors welcomed Warsh cementing his anti-inflation bona fides, the speech was only really “hawkish” relative to his previous public remarks, most notably his poorly received press conference after the Fed's policy meeting in July.

What’s more, the speech actually highlighted just how much Warsh had misfired in the three months since taking over from Jerome Powell at the end of May. As EY-Parthenon chief economist Gregory Daco notes, ‌it took Warsh 100 days on the job to spell out clearly his commitment to, and defense of, the Fed's 2% inflation target. That should be a given, particularly when the labor market is, in Warsh's words, "consistent with full employment". Warsh’s Friday speech was ‌essentially an open goal he couldn't miss. The real work to regain credibility, especially with long-dated yields marching higher, starts now.

MIDDLE OF THE PACK Warsh’s “hawkish” shift only really puts him back in what seems to be the growing middle ground on the 19-strong Federal Open Market Committee.

The three dissenters in July who voted to raise rates — Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari — were far from lone voices. Remember, the minutes of that meeting showed that "several" participants favored a quarter-point rate hike, while "many" said policy tightening will likely be needed to get inflation back down to target. Some of those officials are beginning ⁠to lose patience. Chicago ​Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid both ⁠said in Jackson Hole that tackling inflation must be the central bank's priority. Earlier last week, Boston Fed President Susan Collins said rates may need to be raised soon.

Warsh will now be under pressure to back up his words with action, with the next FOMC meeting only two weeks away. Assuming the Fed's decision ⁠is determined entirely by economic data, the numbers to watch are the August nonfarm payrolls report on Friday, followed by the August CPI and PPI inflation reports next week. Unless these three releases are surprisingly weak, the bar for raising rates this month will be low.

Warsh himself said on Friday ​that the Fed should focus on trends rather than "isolated data points", and also acknowledged that underlying inflation hasn't "meaningfully improved" in recent months. If rates markets continue to lean towards a hike in the run-up to the meeting, Warsh would have little justification ⁠for steering the FOMC towards another hold.

"Otherwise, he risks undermining some of the credibility he gained on Friday," Bank of America economists wrote. TRUMP'S SHADOW

That said, there is still significant uncertainty about how Warsh will vote in two weeks, and that speaks to the elephant that simply won’t leave the room: the specter of political pressure. While Warsh ⁠has ​repeatedly stated that his policy decisions are not influenced by the White House, markets aren’t totally convinced, given the very public and vocal pressure President Donald Trump put on Warsh's predecessor Powell to lower interest rates. Trump on Monday repeated his long-standing view that rates should be cut, although he did add that he has a lot of "respect" for Warsh, who will "do what he has to do."

But Trump's approval rating is stuck at the lowest level of his political career, according to a Reuters/Ipsos poll on Monday, which ⁠also showed that the “cost of living” is by far the most important issue for voters ahead of the November 3 midterm elections. While Trump clearly doesn't want higher interest rates, uncomfortably high inflation and rising longer-term borrowing costs aren't particularly palatable either. Restoring market confidence ⁠won’t be easy for Warsh, given the concerns about political pressure that ⁠continue to follow him and the stumbles he has had out of the gate. He showed on Friday that he can "talk the talk" on inflation — proving he can "walk the walk" could go a long way.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on ‌LinkedIn, and X.

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