Kevin Warsh, chairman of the US Federal Reserve, walks the grounds during the Kansas City Federal Reserve’s Jackson Hole Economic Policy Symposium in Moran, Wyoming, US, on Friday, Aug. 28, 2026.
David Paul Morris | Bloomberg | Getty Images
Just a few carefully chosen words from Federal Reserve Chairman Kevin Warsh convinced markets that he was serious about inflation and ready to recommend an interest rate hike in just a few weeks.
The path in that direction, though, still looks cluttered, with plenty of incentive left to convince Warsh and his fellow central bank policymakers that a move isn’t necessary yet.
Following Warsh’s keynote speech Friday at the Fed’s annual Jackson Hole, Wyoming symposium, markets flipped on rate expectations. Prior, they expected little likelihood of a rate increase until at least December; after that changed to a high probability of one when the Federal Open Market Committee meets in a little more than two weeks.
However, some observers warned that hype for a hike is unjustified.
“It is my belief that we’ve seen a supply shock, and traditionally you don’t raise into a supply shock unless you see second- or third-order effects,” Treasury Secretary Scott Bessent told CNBC on Monday in an interview from the G20 summit in Asheville, N.C. “And we are seeing the core inflation has remained very, very restrained.”
Warsh, though acknowledging that inflation numbers have been soft lately, said the progress isn’t enough and does “not tell me that underlying trends have meaningfully improved.”
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he added.
Switch in expectations
The sum of his remarks caused a sharp repricing in hike probabilities. Odds for a move at the Sept. 15-16 meeting jumped to 66.1% on Monday, nearly double where they were before Warsh spoke, according to the CME Group’s FedWatch.
But Warsh has spoken sternly on the Fed’s inflation mandate before, if with less direction about what he considers the proper response. At a July news conference, he pledged the Fed “will not waver” in its pursuit of 2% inflation. Yet markets took his commitment as less than full-throated, bidding up Treasury yields and lowering the probability of a hike.
Indeed, the chairman’s comments Friday were “relatively uncontroversial and have been restated by Warsh each time he has spoken,” Citigroup economist Andrew Hollenhorst wrote in a client note.
Hollenhorst characterized Warsh’s comments as more hawkish than usual “but only marginally so” and coming amid economic data that indicates no particular urgent need for tighter monetary policy.
“At the July FOMC meeting there was not a consensus to raise rates,” the economist predicted. “Data since that time have shown cooler inflation and softer hiring. There will not be a consensus to hike rates in September. Our expectation for cooler inflation data to continue make rate hikes unlikely this year.”
The Fed will have several key data points to consider before its next meeting.
This week will see important jobs reports, with questions mounting over a labor market that has shown three straight weak nonfarm payrolls numbers. The following week, just before the Fed meeting, will see the consumer and producer price indexes, both of which feed into the central bank’s primary inflation gauge, the personal consumption expenditures price index.
The July PCE inflation reading showed the headline rate at 3.7%, with core at 3.3%. A Dallas Fed measure that strips out extremes on either end held at 2.3%, much closer to the Fed’s goal.
Jobs in focus
There also will be several housing reports, along with retail sales figures released the day of the Fed rate decision.
Of those, the most important will the employment picture, which could dissuade the Fed from hikes, said David Kelly, chief global strategist at JPMorgan Asset Management. Recent data indicates “the economy doesn’t have quite as much momentum as Kevin Warsh suggested in his Jackson Hole speech,” Kelly wrote in his weekly market note.
“Given this, markets may have been premature in now assigning a 60% probability to a September rate hike … While investors should be prepared for possible policy mistakes, there is little in the labor market to suggest inflationary trouble ahead,” he added.
Markets, though, showed confidence that the Warsh Fed is ready to move following a July meeting that saw three of 12 FOMC voters supporting a hike.
Bank of America, meanwhile, is holding to its call for three increases ahead, saying Warsh’s Jackson Hole speech showed markets “a more credible Fed.”
“For us, the key takeaway is that Warsh has raised the bar for standing pat by arguing that the Fed should focus on trends rather than ‘isolated data points’ and that underlying inflation hasn’t ‘meaningfully improved,'” Bank of America economist Aditya Bhave said in a note.
“Absent a material downside surprise, the onus is now on Warsh to deliver a [September] hike,” he added. “Otherwise, he risks undermining some of the credibility he gained on Friday, in our view.”