Federal Reserve Chairman Kevin Warsh ignited expectations for an interest-rate hike in September with his hawkish Jackson Hole speech. Other Fed officials have since softened the message.
Three of the Fed’s policymakers said this week that they are awaiting the August inflation data to determine whether it would be appropriate to approve an increase in the federal-funds rate at the Federal Open Market Committee meeting on Sept. 15-16. Their comments signaled to the stock and bond markets both that a rate hike is far from assured.
The current fed-funds target range is 3.50%-3.75%.
Warsh, who became Fed chair in May, used his Aug. 28 speech at the Fed’s Jackson Hole, Wyo., symposium partly to share for the first time his view of current economic conditions. He also highlighted that inflation has been above the central bank’s 2% annual target for 65 months. While the personal consumption expenditures price index and the consumer price index, two key inflation measures, recently showed price growth cooling, Warsh and other Fed officials remain concerned.
“While this summer’s [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh said at Jackson Hole, noting that the FOMC stands ready to act as circumstances might require.
This week, however, two high-profile Fed officials, Governor Christopher Waller and New York Fed President John Williams, said they would be waiting for the economic data for August to inform their September rate decisions. Waller, in particular, laid out a compelling case at an event in Washington, D.C., as to why the FOMC might decide to hold rates steady in September if the disinflation trend continues.
“My decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation,” he said in prepared remarks. “If there is continued progress towards our 2% goal, then I’m willing to hold—willing to support holding the policy rate at its current level. But if inflation comes in hot, I would consider a rate hike.”
Stocks rose and bond yields fell in response to Waller’s comments. After he spoke, futures-market odds of a quarter-percentage-point rate hike in September fell to 50% from 63% the prior day.
Economists surveyed by FactSet currently expect the Sept. 11 release of the consumer price index to show that inflation rose 3.4% for the 12-month period ended August, in line with July’s increase. Core consumer inflation, which excludes food and energy costs, is expected to show an increase of 2.4% year over year. That would be the lowest rate in more than five years, and reflect a deceleration from July’s 2.5% annual pace of growth.
“That backdrop narrows the September Fed policy question to inflation,” EY Chief Economist Gregory Daco wrote. “Waller stated plainly that with economic activity and the labor market in good shape, they are not large factors in determining the appropriate monetary policy stance.”
Fed governor Michael Barr and Williams also said this week that they would closely monitor the trajectory of incoming inflation data.
There is no “clear science” as to whether monetary policy currently is restrictive enough to bring inflation back to the 2% target or whether policymakers need to take further action to accomplish that goal, Williams said Wednesday on CNBC. He added that the latest data have been “encouraging” in that progress on disinflation is occurring, but said he is waiting for more information to make his call.
Barr, speaking at a forum in Washington, D.C., said he is watching the data for evidence of broader price pressures taking hold. If the trends point to moderation, he said, he would be open to officials taking more time to further assess the effectiveness of keeping the current target range in place. If inflation appears not to be moderating sufficiently, Barr said the Fed should “act decisively” to raise rates.
Waller also distinguished Thursday between communicating policy decisions based on current economic conditions and conditional decisions based on future economic data, which differs, he noted, from unconditional forward guidance.
He said he prefers to explain how policy may respond under different economic scenarios, otherwise known as the Fed’s reaction function, but agreed with Warsh that it is important to avoid policy promises that future data may not justify.
Investors, and others, may gain a better sense of the Fed’s leanings next week when the producer price index for August and the CPI report are released.
Write to Megan Leonhardt at megan.leonhardt@barrons.com