Kevin Warsh said rates could rise this year if inflation does not cool enough

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Trump-appointed Federal Reserve Chairman Kevin Warsh made clear during his Friday appearance at Jackson Hole that interest rates could get hiked this year if inflation refuses to settle down fast enough.

Kevin said summer inflation figures came in cooler than expected, but that was not enough to show the bigger trend had changed. “While this summer’s [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved.” Inflation is running too hot for the Fed to ease up just yet.

Kevin said the central bank wants evidence that inflation is heading back toward its 2% goal quickly enough. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, our mandate and our charge to keep,” he said.

CME Group (NASDAQ: CME) data showed traders pushing the chance of a September increase to 55.7%, roughly 20 percentage points higher than Thursday. The Fed will announce its next decision on Sept. 16.

Kevin keeps inflation front and center as markets price in another hike

Heather Long, chief economist at Navy Federal Credit Union, said Kevin had “opened the door to a Fed rate hike. A hike probably won’t come in September, but it will by October or December.”

Heather added, “Warsh explicitly said this summer’s encouraging inflation readings don’t indicate ‘meaningful’ improvement on inflation. Bond markets reacted swiftly by pricing in a hike.”

Kevin also said markets still believe the Fed will get prices under control. “market prices show confidence that we will deliver price stability. And I can assure you they’re right.” He said inflation needs to stay at the top of the Fed’s list, while calling the economy one that “appears to have strengthened.”

He identified AI as one of the reasons for growth and explained that people and companies continued to spend. While hiring has become less vigorous, he attributed that to the labor force no longer growing at the same rate.

Kevin’s prepared comments showed how he wants the Fed to handle policy. Kevin did not lay out a rate path or give markets data points that would force the central bank to act. “I stand here today committed to a discipline, not to a decision,” he said before Federal Open Market Committee officials, economists, and reporters.

Kevin is criticized for being restrictive in providing policy signals as long as the inflation rate exceeds the targeted level.

Kevin opposed the concept of forward guidance, saying that the market should pay attention to numbers rather than looking for hints from the Federal Reserve. In his speech titled “In Our Time,” Kevin noted, “You can call it an outline, you can call it a trail map, but don’t call it forward guidance.”

Stocks, bonds, gold and Bitcoin slide as Kevin leaves another hike possible this year

Kalshi traders changed their bets after the speech. The market put the odds of a 25-basis-point increase at 48%. Before Kevin spoke, almost 70% expected no September change. Treasury yields moved higher. The 2-year yield, which reacts to Fed expectations, climbed to its highest point since late July.

Wall Street ended Friday lower, even though the main indexes finished the week up. The S&P 500 dropped 0.25% to 7,711.76. The Nasdaq Composite lost 0.52% to 26,402.42 as chip stocks weakened, including Nvidia (NASDAQ: NVDA) and Intel (NASDAQ: INTC).

The Dow Jones Industrial Average fell 9.45 points, or 0.02%, to 53,559.99. For the week, the S&P 500 rose 0.5%, the Nasdaq gained 0.9%, and the Dow climbed 0.5% for its first weekly gain in three.

Gold moved lower, too. Spot prices slipped under $4,500 an ounce after Kevin said price stability had become the Fed’s “predominant focus.” Inflation is still above 2% five years after the jump that carried it past the central bank’s target.

Bitcoin sank $3,000 in roughly 60 minutes as traders reacted to higher rate expectations. Around $200 million in leveraged long positions were wiped out during the drop, adding forced selling.

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