Warsh tells Jackson Hole the Fed has work to do if inflation does not fall toward 2 percent

Federal Reserve Chair Kevin Warsh told the Kansas City Fed's Jackson Hole symposium on Friday that policymakers will "have work to do" if they cannot be confident inflation is moving to 2 percent "clearly and at sufficient speed." Traders treated the line as an opening to a rate increase. CME Group data put the chance of a September hike at about 62 percent after the speech, against 35 percent the previous day. Reuters recorded a move from about 40 percent to 60 percent on the same question.

The policy rate sits between 3.5 and 3.75 percent. Warsh became chair in May. He has spent the summer under pressure to say whether the next move is up. At a late July press conference he declined to sketch a reaction function. Friday was the first time he put a standard on the record in a prepared text.

The numbers he used

Warsh said the Fed's preferred personal consumption expenditures index was running at 3.7 percent over 12 months and at a 4.1 percent six-month annualised pace in July. He said the 2 percent PCE target is "firm" and "fixed." He counted 65 months of inflation above that target and said responsibility for that stretch "sits squarely with the central bank."

Recent prints have been softer than the spring peak. Warsh said those prints "do not tell me that underlying trends have meaningfully improved." He described inflation expectations as anchored for now and said they must be watched closely. He also said he would not offer forward guidance and that his remarks should not be read as a mechanical rule.

On the real economy he was less alarmed. Unemployment was 4.1 percent in July. He called labour markets consistent with full employment, with a caveat for recent graduates. Housing and agriculture, he said, show strain. Overall activity, in his account, is not being dragged down by the current level of rates. That combination (strong demand, sticky prices) is the textbook case for a hike, which is why the futures market moved.

The political edge

President Donald Trump has spent years arguing for lower rates. A chair who says the job is price stability first is setting up a public disagreement if September's meeting produces 25 basis points up rather than a pause. Warsh did not name the White House. He did say market prices already assume the Fed will deliver 2 percent, and that those markets are right.

Heather Long, chief economist at Navy Federal Credit Union, told CBS she read the speech as opening the door to a hike, more likely in October or December than in September. That is one reading. The futures strip after the speech is another. Neither is a vote. The Federal Open Market Committee still has a jobs report and another inflation print before it sits.

What "work to do" can mean

Raising the funds rate is the obvious tool. Shrinking the balance sheet faster is another. Talking the path of rates higher without moving this month is a third. Warsh rejected the idea that he would publish a formula. He also rejected the idea that the target itself is up for redesign, after musing in July about other inflation measures.

Jackson Hole speeches are remembered when they change the odds. This one did that in an afternoon. Whether it changes the September decision depends on the next two data releases, and on whether Warsh's colleagues hear "work to do" as a warning or as a calendar.