Fed Rate Hike Shock: Why Markets Suddenly Fear September

**Kevin Warsh** (0:00)
Now, there is one signal nobody can miss. Responsibility for 65 months of sustained elevated inflation sits squarely with the Central Bank, and that's where it belongs.
So here is my standard. 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, that's our mandate, and that's our charge to keep.

**David Lin** (0:28)
That was Federal Reserve Chair, Kevin Warsh, at his first Jackson Hole Symposium as Fed Chair last Friday. His comments at his speech about inflation being above the Fed's target and the Fed needing to take action was interpreted as very hawkish by markets. And on Friday, markets moved down sharply. The S&P 500 sold off at exactly the same time as his speech, while gold gapped down 3% and Bitcoin sold off 3% and treasury yields climbed. Basically, markets moved the way they did because investors believed Warsh practically signaled a Fed rate hike in September. The Jackson Hole Symposium, which is a famous annual conference for central bank leaders held at Jackson Hole, Wyoming, has historically been closely watched as a Fed share speech at the event gives important hints on what the Fed may do next. Since Jackson Hole ended last weekend, the probability of a 25 basis point rate hike on September 16th, the next FOMC meeting jumped to 66% according to the CME FedWatch tool.
In my time as a reporter and on YouTube, I've never known the CME FedWatch tool to be inaccurate, especially the closer it gets to the actual event. So there's one important piece of context here to note. Warsh has repeatedly highlighted that the Federal Reserve should be looking at trends, not just individual data points. Here's more of what Warsh thinks of inflation's trend.

**Kevin Warsh** (1:53)
Inflation is running above our 2% target, so the Fed's predominant focus right now should be on prices.
So what's our job? The job for policymakers is to capture underlying trend inflation. Easier said than done. We want to gauge whether underlying inflation is rising, falling, or seems to be stuck in place. We also want to understand not just the direction of travel, but the speed. Each of these broad inflation measures have fallen significantly from their highs of a few years ago, but progress over the last couple of years has been more modest.

**David Lin** (2:31)
Still, some economists think that a September rate hike is not a certainty for now. Here's Colin Martin, head of fixed income strategy for Charles Schwab on my show last week.
So the bottom line is that prior to the Jackson Hole Symposium on the Charles Schwab website, he says that, well, you know, we expect the Fed to remain on hold for now, but it's a low-conviction call for now, given inflation and certainty. Nothing he said today has changed. That stands for now. Correct, Colin?

**Colin Martin** (3:02)
Yeah, keyword for now. So, you know, we think that there's a handful of committee members that have voted to hold, and they're probably, you know, they're very aware of how high inflation is, and I think they're looking for that reason to get off the old seat and move to the hike seat. We know there's a few, you know, we know there's voters who've dissented. We know there's some non-voters who favor hikes right now, like Jeffrey Schmid.
But I think if there's the committee members or Warsh himself that are looking for that specific reason, they haven't gotten it just yet. Now that could change. You know, we're gonna get another inflation print before the September reading. If CPI for August comes in a little bit hot, that might be enough to move the needle. But as we sit right here at the end of August, our view is unchanged that we think that they can remain on hold unless we get some positive surprises, you know, a stronger labor market or higher than expected inflation.

**David Lin** (4:00)
Warsh reiterated the Fed's ultimate objective to watch over consumer prices. Take a listen.

**Kevin Warsh** (4:05)
The Fed's price stability objective of 2% as measured by the PCE price index is a firm fixed target.
Let me be equally clear about another aspect of this objective. Price stability is not self-executing, nor is inflation necessarily mean reverting. It's the Fed's job to deliver stable prices, no excuses. Fourth principle, the Fed also bears responsibility for maximum employment.
Achieving both sides of our mandate over the medium term is not an either or proposition. I do not believe the Fed's dual mandate works across purposes. After all, high inflation itself is very harmful to economic prosperity.

**David Lin** (4:54)