Treasury Secretary Scott Bessent’s announcement on new sanctions against Iran could move markets Monday, but bond traders are already looking ahead to an arguably bigger event: Federal Reserve Chair Kevin Warsh’s speech at Jackson Hole.
Why it matters: Markets remain uncertain about how Warsh views inflation and where he wants interest rates to go. His Jackson Hole address could provide the clearest indication yet, particularly with the Fed’s preferred inflation gauge and another estimate of second-quarter GDP coming this week.
- The Wall Street Journal’s Nick Timiraos, Anthony DeBarros and Peter Santilli argue that Warsh’s reluctance to signal the path of rates has left investors unsure about his economic philosophy. But his previous tenure as a Fed governor from 2007 through 2011 provides some clues.
Warsh’s projections: During that period, Warsh regularly worried more about inflation than many of his colleagues. Following the financial crisis, other Fed officials believed unemployment near 9% represented enormous economic slack that would keep inflation subdued. Warsh was more skeptical, believing the crisis and government policies had permanently damaged the economy’s productive capacity and pushed the sustainable unemployment rate higher.
- That distinction remains important today. Warsh has historically focused less on traditional demand-side indicators such as unemployment and more on supply constraints, productivity and government policy when evaluating inflation risks.
- Warsh’s inflation warnings after the financial crisis ultimately proved premature. Economic growth remained weak and the inflation he feared didn’t arrive until roughly a decade later, following the pandemic and massive fiscal and monetary stimulus.
Today is different: But today’s environment is very different. As Timiraos, DeBarros and Santilli note, Warsh must now interpret an economy undergoing a potentially enormous technological transformation while inflation has already remained above the Fed’s 2% target for five years.
The bottom line: Warsh has historically been more willing than his colleagues to see inflation risks hiding beneath seemingly weak economic data. With inflation still elevated, markets will be listening closely at Jackson Hole for signs that the instincts he displayed during his first stint at the Fed are guiding him once again.