Fed Chairman Kevin Warsh Called Inflation ‘More Concerning’ at His First Jackson Hole Speech. Does That Signal a Rate Hike Is Coming?

“What’s the Fed going to do?” is a question that Wall Street would love to know the answer to. In the past, Federal Reserve Chairmen would provide pretty explicit guidance about what investors should expect. Under new Fed Chair Kevin Warsh, however, that dynamic has changed. But he can’t avoid stating the obvious, either, which is why stubborn inflation readings are “more concerning.” And it wouldn’t be a shock to see a rate hike in the near future.

Warsh wants Wall Street to do its job

The Federal Reserve sets interest rates to help guide the U.S. economy. The goal is two-fold: high employment and stable prices. These two goals can be contradictory at times, so the Fed is always walking a tightrope. Since the turn of the century, however, the Fed has provided substantial guidance to the market to help investors prepare for what lies ahead.

Image source: Getty Images.

Warsh believes this has to change, at least partly because overly explicit guidance leads investors to take on more risk than they otherwise might. It also means the Fed is taking on the entire burden when it comes to rates. Historically, investors have played an important role, too, pushing market rates up and down in real time in response to changing market conditions. Market-driven rate moves can reduce the need for the Fed to change its rates, as markets naturally adjust to new information. This is why the Fed has offered much less guidance under Warsh.

Warsh was just stating the obvious about inflation

But Warsh can’t ignore obvious developments as he discusses the market environment. Which is why, after the important Jackson Hole Fed meeting, he stated that, “on the price-stability side of our mandate, the numbers are more concerning.” Inflation has been running hot; everyone knows that. He wasn’t trying to tip the market off on something it had missed.

Still, while it wouldn’t be fair to call the statement guidance, it does provide some indication of what the Fed is thinking about. And if inflation is high, the Fed may have little choice but to step in and raise rates. Those are just facts, not predictions, even though it seems highly likely that a rate hike is in the cards in the near future based on Warsh’s observations.

Essentially, the expectation of a rate hike here is more about reviewing the evidence and reaching an informed conclusion. Which is exactly what Warsh would like investors to do. So while Warsh’s comments probably aren’t a signal, they do have value for investors willing to think critically about the future.