Coin toss.
That was the clear message financial markets delivered to Federal Reserve Chairman Kevin Warsh following his inaugural address at the central bank’s annual economic symposium in Jackson Hole, Wyoming, which revealed a pronounced shift toward hawkish monetary policy.
Warsh’s August 28 remarks, delivered on his 100th day as Fed chairman, addressed the need for more sophisticated inflation monitoring—a departure from the ambiguous messaging that many investors said they perceived from him after the July policy meeting.
Consequently, the chairman’s commitment to addressing persistently high inflation—”We have work to do”—prompted a recalibration of market expectations. The CME Group FedWatch Tool now shows nearly 60% probability for a 25 basis-point rate increase next month, a significant jump from the 35% likelihood recorded the previous day.
“Certainly that’s a close call,” Morgan Stanley Chief U.S. Economist Michael Gapen told CNBC, noting that “our view is inflation is decelerating” and this development should be sufficient to keep the Fed on hold next month. However, Gapen emphasized that the critical factor is the pace and magnitude of that inflation slowdown.
John Luke Tyner, Portfolio Manager and Head of Fixed Income at Aptus Capital Advisors, told TheStreet in an email that Warsh’s remarks delivered precisely what market participants were seeking: a more comprehensive perspective on the economy and inflation dynamics, which appeared to address investor concerns.
“His comments indicated that underlying inflation trends have not meaningfully improved, and if they don’t improve quickly, then there is more work to do at the Fed. This reassured market participants that Warsh and his team aren’t going to sit back and wait even longer for the inflation target to be achieved,” Tyner stated.
Why the September rate-hike bet remains a coin toss
Greg Gizzi, Head of Fixed Income and Municipal Bonds at Nomura Asset Management International, told TheStreet in an email that he anticipated the Federal Open Market Committee would maintain its benchmark short-term interest rates at its September 16-17 meeting.
“The hawkish messaging was unmistakable, with the Chairman stating he would be ‘hard pressed to describe broad financial conditions as restrictive’ and noting that credit and loan activity show little evidence of restraint,” he said.
Gizzi noted that Warsh emphasized inflation expectations in the medium term “are not pushed around easily, and right now they are well anchored.”
“This anchoring of expectations is significant and suggests underlying confidence in the inflation trajectory, providing an important counterbalance to the otherwise hawkish tone,” Gizzi observed.
Warsh emphasizes inflation concerns within the Fed’s mandate
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
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Lower interest rates support hiring but can fuel inflation, potentially triggering an inflationary spiral.
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Higher rates cool prices but can weaken the job market, increasing borrowing costs and stifling economic activity.
As reported, the rate-setting FOMC voted 9-3 last month to maintain its benchmark Federal Funds Rate target in a range of 3.5% to 3.75%. The three dissenting members favored a 25 basis-point increase due to inflation concerns.
Policymakers had reduced rates by 25 basis points at their final three meetings of 2025 to support the softening labor market.
These “insurance” cuts ceased after the majority of policymakers concluded that the risk from elevated prices outweighed signs that the jobs market was stabilizing.
Tyner noted that Warsh’s commentary “aligns more closely with the increasingly hawkish stance expressed by other Fed officials and the three dissenting votes in July. We still believe a significant factor in determining that meeting’s outcome will be the August employment and CPI reports expected over the coming weeks.”
The federal funds rate is the interest rate at which banks lend reserve balances at the Federal Reserve to other banks overnight.
Adjustments to the federal funds rate trigger changes in short-term borrowing costs, affecting everything from credit cards to student loans and home equity lines of credit.
Key inflation measures remain elevated
The Wealth Alliance CEO and Managing Director Robert Conzo stated that the 12-month change in the Personal Consumption Expenditures—a key measure of consumer spending—and the Consumer Price Index remain elevated.
“Over the most recent six months, 49% of PCE basket components showed price increases above 3%. Summer PCE and CPI readings were better than expected but did not indicate a meaningful improvement in underlying inflation trends,” Conzo told TheStreet in an email.
Warsh also reinforced his reluctance to provide forward guidance to markets, according to Conzo.
“As a further example, the Chairman cautioned against the ‘hall of mirrors’ problem—markets relying on Fed guidance for trading decisions while the Fed simultaneously relies on market prices—a dynamic that can blind both parties to new economic developments,” Conzo explained.
Warsh also discussed AI’s impact on Fed activities
Cetera Financial Group Chief Investment Officer Gene Goldman observed that Warsh’s Jackson Hole speech refrained from providing clear signals on interest rates, but “he sounded upbeat on the economy while making clear he’s still worried that inflation isn’t cooling fast enough.”
Specifically, Goldman told TheStreet in an email that his three key takeaways from the speech are:
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Warsh won’t signal rate moves anymore. The Chairman contends that the traditional Fed practice of hinting at future rate decisions creates a feedback loop where the Fed and markets chase each other’s signals instead of focusing on actual economic conditions, so he’s deliberately avoiding such hints.
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Growth is solid, but inflation remains problematic. Business investment, corporate profits, and employment all appear robust, yet inflation continues to run near 3.7%—well above the Fed’s 2% target—and Warsh doesn’t see clear evidence that it’s actually declining.
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Artificial intelligence is now a Fed priority. Warsh is treating AI’s economic impact as a significant unknown warranting careful study, with a new task force examining the issue, though he emphasized it won’t influence any near-term rate decisions.
