Just like a date who texted after ghosting you for three days, the tight-lipped Fed Chair Kevin Warsh finally opened up a little about what’s on his mind. Yesterday, he said that the Fed will have “work to do” if inflation doesn’t cool, during his widely watched keynote speech at the Fed’s yearly conference for central bankers in Jackson Hole, Wyoming. Analysts translated this from Warshspeak as: Don’t be surprised by an interest rate hike soon, *wink wink.* The sound bites were the clearest signal Warsh has given about his outlook since becoming chair—even as he defended his view that the Fed should keep mum on its plans. Inflation is top of mindWarsh shared some revealing thoughts about the current economy: - He noted that inflation remains above the Fed’s 2% annual target and that he doesn’t see recent data showing it cooling as a meaningful improvement.
- Warsh also said that the Fed should focus on inflation rather than the job market—which he deemed stable—and that rate hikes were the main tool to achieve price stability.
Wall Street took it as a sign that Warsh and co. are leaning towards raising borrowing costs. The trading odds of a rate hike at the Fed’s meeting next month jumped from 35% to 58% shortly after Warsh finished speaking, per CME Group data. Bond traders also priced in a rate hike: The yield on the 2-year government bond—which moves in the opposite direction to price and is closely correlated with the interest rates the Fed sets—rose from 4.24% to as much as 4.36% in the hours after Warsh finished speaking. Meanwhile, the 30-year Treasury yield dipped slightly yesterday, after soaring to a 19-year high last week, which many experts saw at the time partially as a sign that investors doubted that the Fed was prepared to contain prices with interest rate hikes. What’s next? The Fed will have one more inflation data reading to consider a few days before its September meeting to help it decide what to do with interest rates. Big picture: While this was the furthest Warsh has gone to offer markets clarity about potential rate moves, he argued that too much communication can confuse investors, who he believes should guide Fed policy instead of the other way around.—SK | 
