Warsh’s Hawkish Remarks Amounted to Forward Guidance, Blinder Says

Markets knew they were unlikely to get a definitive answer on what the Federal Reserve would do next when Fed Chair Kevin Warsh spoke at the Jackson Hole economic symposium.

Blinder said a September rate hike was on the table and predicted that the Fed could raise rates by a quarter of a percentage point before pausing.

The key question was whether he would provide clues about how the central bank would respond to persistent inflation.

Former Fed Vice Chairman Alan Blinder, now a professor of economics at Princeton University, said Warsh effectively did so.

Warsh painted a relatively strong picture of the US economy, saying growth appeared to have strengthened and describing the labor market as stable and near full employment.

At the same time, he stressed that inflation remained too high. While recent summer inflation readings had been better than expected, Warsh said they did not convince him that underlying inflation trends had meaningfully improved. 

“I would call that forward guidance,” Blinder told Yahoo Finance. He interpreted Warsh's comments as signaling that the Fed may need to raise interest rates.

Blinder said a September rate hike was on the table and predicted that the Fed could raise rates by a quarter of a percentage point before pausing.

His comments came as financial markets increased their expectations for a September hike: the probability rose to nearly 60%, from about 35% on Thursday, according to market pricing cited by Yahoo Finance. 

Warsh did not explicitly promise a rate increase. Instead, he outlined the economic indicators he is watching, including inflation, corporate earnings, capital spending, asset prices, business confidence and consumer spending.

He also reaffirmed the Personal Consumption Expenditures price index as the Fed's preferred inflation gauge.