Warsh Arrives at Jackson Hole

• Fed Chair Kevin Warsh will address central bankers, economists, and journalists in Jackson Hole, Wyoming this morning at 10am ET. Investors are hopeful that he’ll be chattier than he has been during his brief tenure as Fed chair.  In a perfect world, markets would like to hear his thinking regarding the reaction function and forward guidance from a Warsh-led Fed. They’re not likely to get that much clarity but something more than business class platitudes, and buzz phrases will be most appreciated.  His keynote address concludes a week that saw the Fed’s preferred inflation measure somewhat confirm the cool CPI and PPI findings from two weeks ago, but annual inflation remains uncomfortably above the 2% target and that may get addressed by Warsh in today’s speech.  While Warsh and the Fed are focused primarily on the price stability mandate, the full employment mandate will get its moment next week with plenty of first-tier reports culminating with August payrolls next Friday. Markets are mostly quiet as they await the Jackson Hole event.  Currently, the 10yr is yielding 4.69% up 2bp, while the 2yr is yielding 4.23%, unchanged on the day.

• As mentioned above, today’s speech by Kevin Warsh is hotly anticipated and given the negative reaction after his limited remarks following the July FOMC meeting, he’s likely to be a bit more forthcoming today. That’s the hope anyway. While we probably won’t get a detailed explanation of when the next Fed move will come, we are likely to get a forceful restatement of his commitment in wrestling inflation back to its 2% target. That forceful price stability commitment was missing in the July meeting and contributed to the market reaction of higher yields. He won’t make that mistake again. It would also be a forceful statement for Fed independence and that too was subject to some debate after the July meeting.

• Warsh likes keeping his policy thoughts close to his vest as he has stated that disclosing them sometimes leads to confirmation bias and looking for evidence of your public position rather than taking in all information objectively. While we’re not likely to get a full-on reaction function description, the market would like a little more in the way of his thinking regarding achieving the dual mandate the Fed is charged with. Given that there is no Q&A, expectations are somewhat tempered for real specifics in today’s address, but we do expect a market reaction regardless of how much he does or doesn’t disclose.  Odds of a rate hike in September remain in the 1-in-3 range at 36%. We’ll check back on that reading after the speech.

• As we mentioned above, next week the page turns and the labor market gets its day in the sun. As is typical for the first week in a new month, first-tier reports come fast and furious culminating in the payrolls report on Friday. Expectations are for a modest gain of 60 thousand jobs with the unemployment rate increasing a tenth to 4.2%. Given the slowing in labor force growth, job gains in the 50 thousand range seem to be the new equilibrium to keep the unemployment rate stable, and that metric seems to be the guiding light as many Fed members have mentioned it in discussing labor market stability.

• Speaking of Fed members, probably the most hawkish right now is Cleveland Fed President, Beth Hammack and on CNBC yesterday she reiterated that now is the time for officials to act to contain inflation, adding that interest rates are not slowing the economy enough for price pressures to cool on their own. She said, “I think it’s appropriate for us to put some restraint there to help bring inflation back down to target.  The longer inflation stays above our objective, the harder it will be for us to bring it back down.”

• Hammack was one of the three dissenting voters in July so it’s not surprising that she is itching to hike. It’s illuminating, however, that she reiterated her view prior to Warsh’s address. It’s unlikely she would offer up something that he’s not on board with, this close to his address, so we anticipate a similar sentiment from Warsh this morning. We shall see.

Futures See 36% Odds of Rate Hike in September Before Warsh’s Jackson Hole AppearanceSource: CME Group

July Core CPI vs. Core PCE – Core PCE Lagging CPI ImprovementSource: BEA

Real Spending (Adjusted for Inflation) Weakens in JulySource: BEA