Kevin Warsh’s inflation message misfires

Kevin Warsh’s bare-bones communication style has left investors doubting his commitment to curb inflation, putting more pressure on the new Federal Reserve chairman to back up his words with interest-rate hikes.Within hours of his press conference following the Fed’s latest policy meeting Wednesday, analysts at JPMorgan Chase & Co. pulled forward their call for a rate hike from the second half of 2027 to this December.Also Read: ‘Inflation remains elevated’: Fed holds rates steady; Kevin Warsh defends policy stance | FOMC meet“He once again failed to specify how he intended to achieve his stridently asserted inflation resolve,” JPMorgan’s Michael Feroli wrote.

“We believe this will add some urgency for the rest of the committee to act on its mandate.”Warsh’s performance came shortly after Fed officials decided in a 9-3 vote to leave rates unchanged, as they’ve done all year.

The rate decision was widely expected, and investors took it in stride.

Warsh, however, didn’t offer a clear explanation for the move or say he would support raising rates should inflation fail to slow.The market reaction was harsh.

Stocks ended the day sharply lower as concerns about inflation drove longer-dated bond yields to an almost two-decade high.“The press conference damaged his credibility to some extent,” said Stephanie Roth, chief economist at Wolfe Research.

“His communications style appears to be backfiring and the market is calling his bluff.”High stakesAt stake is Warsh’s ability to lead a committee that is gradually losing patience with high inflation.

Households and businesses could also start to doubt their long-standing belief that the Fed will do what it takes to contain inflation.Also Read: ‘I don’t want to disappoint you but…’: Kevin Warsh clashes with Waters over independence of fedLosing credibility with markets “could lead to persistently higher long-term bond yields, and an unmooring of inflation expectations,” said Robert Sockin, chief US economist at PGIM.

“We suspect that public comments from Warsh and other participants after this meeting will have to further double down on the hawkishness to clean up what was ultimately a perplexing press conference,” he added.Warsh is not the first Fed chairman to miss the mark.

In 2014, Treasury yields jumped after Janet Yellen said in her first press conference as Fed chair that rates could rise “around six months” after the central bank wound up its asset purchases.

More recently, Jerome Powell called the pandemic driven inflation shock “transitory,” a term he later came to regret.But Warsh’s performance was surprising, given that a reasonable argument for a rate hold was available.A pause in hostilities between the US and Iran in recent days has tempered the most recent surge in oil prices.

A better-than-expected June inflation reading offered Fed officials time to monitor price pressures, and most economists agree the labor market is not contributing to inflation concerns.Policymakers will get a look at fresh inflation data on Thursday.Market ratesOther Fed officials had already explained their support for holding rates.

Vice Chair Philip Jefferson described policy as well positioned, while Governor Lisa Cook said it was prudent to allow more time to see how inflation unfolds.

New York Fed President John Williams even suggested that inflation has peaked.“All he had to say today was: ‘We didn’t hike today because I think inflation will come down in the coming months.

If that’s wrong we will hike in September,’” Roth said of Warsh.

“Obviously he didn’t say that though.”Instead, the Fed chief chose to point to the bond market.

He argued that higher longer-term market rates since the Fed’s June meeting showed investors were hearing his promises to deliver price stability and doing the Fed’s work for it by tightening financial conditions.“Even while at some level we haven’t done much in 42 days,” Warsh said, referring to his time at the Fed, “the markets have done quite a bit.”Analysts weren’t buying that explanation.

Derek Tang, an economist at Monetary Policy Analytics, agreed that financial conditions had tightened, but for a “bad reason.”“It’s almost reflecting doubt in the Fed’s resolve, so I don’t think this is something to advertise,” he said.Jackson HoleWarsh will have a chance to course correct on a major stage in August at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.

But asked about his upcoming speech on Wednesday, Warsh offered few clues.“I look at it like a blank piece of paper right now,” he said, adding that he hoped to address some of the “big questions” he has given to his five task forces, ranging from communications to artificial intelligence.If he declines to take that opportunity to clarify the Fed’s direction, others may do it for him.

Already on Wednesday, Dallas Fed President Lorie Logan, Cleveland’s Beth Hammack and Minneapolis Fed chief Neel Kashkari dissented in favor of a quarter-point hike.By the time policymakers gather again, in September, more Fed officials might agree that it’s time to deliver higher interest rates, and Warsh may have to follow their lead.The Fed’s “margin of inflation tolerance — excluding Warsh — now appears so narrow that any meaningful inflation miss could force a September hike,” said Gregory Daco, chief economist at EY-Parthenon. ...