US Economics /CITI’S TAKE
Chair Warsh surprised markets on Friday with a more hawkish Jackson Hole speech, leading markets to again price over a 50% chance of a hike in September. While downplaying recent softer CPI/PCE data was hawkish, we do not think Warsh, who doubled down on not providing forward guidance, is giving an explicit indication of a policy move at the September meeting. We continue to think data before September will be soft enough for officials to keep policy rates unchanged. This includes a modest 20k increase in August payrolls next Friday and further slowing in August core CPI to around 2.35%YoY. Our forecast for August core PCE, finalized the Friday before the September meeting, will very likely show year-on-year core PCE dropping by around 30bp due to upcoming revisions.
The main event of the week was Friday’s speech from Chair Warsh at Jackson Hole, which ended up being somewhat more hawkish than we were expecting. 2-year Treasury yields moved over 10bp higher following the speech and markets are again pricing over a 50% probability of hike in September.
To us, the more hawkish development was Warsh downplaying recently softer CPI/PCE data. But it is not unusual for Fed officials to be cautious around interpreting just one or two months of data – usually officials see three months as more indicative of a trend. We expect another month of softer employment and inflation data before the September meeting will again have officials keeping rates on hold next month.
Warsh also hawkishly noted that financial conditions are not restrictive (although he has said similar in the past) and recommitted to the Fed’s 2% target of PCE inflation specifically. Under previous regimes, hawkish indications that the Fed would have “work to do” if inflation does not slow “at sufficient speed” at the Jackson Hole speech could be a nod to a rate hike at an upcoming meeting. But Warsh reiterated that the policy of forward guidance has “overstayed its welcome”. We would not see his Jackson Hole speech as indicating a rate hike should be expected in September, which will ultimately depend on upcoming data (which we expect to be softer). Like in July, Warsh is likely comfortable with some chance of a change in policy rates priced-in going into the meeting, but then ultimately leaving rates on hold.
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