"We Have Work to Do": Fed Chair Kevin Warsh Expresses Concern Over Inflation in Closely Watched Jackson Hole Speech

Kevin Warsh, chair of the interest-rate-setting Federal Open Market Committee (FOMC), remains unpredictable.

In his highly anticipated speech made at the Jackson Hole Economic Symposium, Warsh returned to his more hawkish signaling, specifically saying, "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Warsh's speech instantly brought a potential September rate hike back into play.

Following his speech on Aug. 28, the likelihood of a rate hike in September surged to 57.5%, as of this writing, up from about 35.5% yesterday, according to CME Group's FedWatch tool.

Here's why Warsh is still concerned about inflation.

Image source: The White House.

Underlying trends are still worrisome

Prior to Jackson Hole, the market had become more dovish about Warsh and the Fed, following softer inflation reports in June and July and weakness in the July jobs report.

However, Warsh in his speech made it clear that this data does not mean that inflation has been beaten.

"And while this summer's PCE (Personal Consumption Expenditures price index) and CPI (Consumer Price Index) readings were better than expected, they do not tell me that underlying trends have meaningfully improved," Warsh said. "The data also show moderate wage growth. But in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time."

Warsh said to truly try and see where inflation is going, he disaggregates all 199 individual components of the PCE, which is the Fed's preferred inflation gauge.

The PCE tracks price changes for what consumers pay out of pocket and also what third parties may pay on consumers' behalf.

A common example used by economists is looking at healthcare costs. The PCE tracks what consumers pay for premiums and deductibles, as well as costs covered on their behalf by insurance firms or Medicare and Medicaid.

US Core PCE Price Index YoY data by YCharts

Warsh said that over the past year, over half of the items tracked in the PCE showed price increases above 3%. This is below a high of 77% seen in the post-pandemic era, but significantly above the 32% level observed in the 20 years before the pandemic.

Warsh also warned that the recent increase in commodity prices needs to be carefully monitored.

Still a fluid situation

In my mind, the big takeaway is that September and the Fed's remaining meetings this year are up for grabs regarding whether the Fed hikes rates or keeps them steady.

There is support among certain FOMC members for raising rates, but I still think a few factors could keep the Fed on hold, barring any more extreme data in the coming months.

For one, Warsh has previously said he doesn't necessarily like the current way the Fed measures inflation. There is currently a Fed committee looking at this right now.

Furthermore, U.S. Treasury Secretary Scott Bessent's recent announcement that the Treasury would increase its repurchases of longer-dated bonds to rein in longer-term yields would also seem counterintuitive to a rate hike.

However, given the market is worried about inflation, perhaps a rate hike could help lower longer-term bond yields by showing the Fed is willing to do what's necessary to bring down inflation.

All of this is to say that I don't think Warsh's Jackson Hole speech makes rate hikes in September, or even this year, a sure thing.

I'm still in the camp that the Fed will hold rates steady, but the situation remains fluid.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.