Federal Reserve Chair Kevin Warsh used his first Jackson Hole speech to reshape his communication strategy, according to BCA Research.
The firm said Warsh delivered a message much closer to traditional central bank policy than investors may have expected based on his first two Federal Reserve meetings.
Warsh Moves Closer to the Broader FOMC
BCA strategist Felix Vezina-Poirier said Warsh outlined a policy reaction function broadly consistent with the rest of the Federal Open Market Committee.
That represented a shift from the uncertainty surrounding his earlier appearances as Fed Chair.
Rather than committing to a specific move at the September meeting, Warsh explained how incoming economic data would influence future interest rate decisions.
Markets are currently pricing roughly even odds of another rate hike in September.
Fed Reaffirms 2% Inflation Target
One of the most important parts of Warsh’s speech was his renewed commitment to the Federal Reserve’s 2% PCE inflation target.
BCA noted that Warsh had previously left open the possibility of reviewing that target in July.
His Jackson Hole remarks provided more clarity by reaffirming the existing inflation objective.
Warsh also confirmed that the federal funds rate will remain the Fed’s primary monetary policy tool for the time being.
BCA Says Economic Data Do Not Justify a Hike Yet
Despite the more hawkish tone, BCA Research does not believe current economic conditions support an immediate interest rate increase.
Recent labor market and inflation data have come in somewhat weaker than expected.
As a result, the firm believes the underlying U.S. macroeconomic picture has not changed enough to justify a significantly more aggressive Fed policy outlook.
Markets Price More Fed Tightening
Financial markets responded to Warsh’s Jackson Hole speech by increasing expectations for additional monetary tightening.
However, Vezina-Poirier cautioned against interpreting the speech as evidence that a rate hike is certain.
BCA would need to see stronger-than-expected labor market and inflation data before adopting a more bearish outlook on short-term interest rates.
This means upcoming U.S. economic releases could play a critical role in shaping expectations ahead of the September FOMC meeting.
Core PCE Inflation Could Continue to Ease
BCA Research also expects underlying PCE inflation to decline as unusually large price movements gradually disappear from the data.
Twelve-month core PCE inflation is currently running 88 basis points above core CPI.
However, the difference between trimmed mean PCE inflation and trimmed mean CPI is significantly smaller, at only 29 basis points.
BCA believes this suggests some of the current gap between the two major inflation measures could prove temporary.
Fed Rates May Stay Near Current Levels
Despite markets becoming more hawkish following Warsh’s speech, BCA strategists continue to expect the federal funds rate to remain close to its current level.
The firm argues that stronger evidence of renewed inflation or labor market strength would be needed before another rate increase becomes clearly justified.
For investors, that places even greater importance on upcoming inflation, employment, and economic growth data as markets determine whether Warsh’s hawkish pivot will translate into actual policy tightening.
