Kevin Warsh does not like forward guidance, and on Friday in Jackson Hole he gave the clearest example yet of what that sounds like. He would not say the Federal Reserve will raise rates in September. He said he had seen “little sign” that borrowing conditions are restraining the economy, that better inflation readings this summer “do not tell me that underlying trends have meaningfully improved,” and that the Fed must be confident inflation is heading to 2% “clearly and at sufficient speed. Otherwise, we have work to do.”
Then the line the market underlined: “I stand here today committed to a discipline, not to a decision.”
Interest-rate futures did the deciding for him. By Friday afternoon the odds of a quarter-point increase at the September 16 meeting were about 58%, from 35% the day before. Two-year Treasury yields — the ones that track the Fed’s next move — jumped. Ten-year yields fell, then climbed, and kept climbing Monday to 4.757%.
What he actually argued
Three things. First, that the policy rate near 3.6% is not doing much restraining. Second, that the breadth of inflation matters more than the headline: about half the items in the personal-consumption basket are still rising faster than 3%, against roughly a third in the two decades before the pandemic. Third, that the Fed should stop assuming inflation reverts to 2% by itself — which, as the Journal’s editorial board noted, puts the central bank on the hook for every tenth of a point.
He also set aside the usual argument for patience. Moderate wage growth, he said, “has not proven a reliable indicator of future inflation for a very long time.”
| What moved | Before | After |
|---|---|---|
| Odds of a September hike (CME) | 35% | 58% |
| Ten-year Treasury yield | 4.671% (Thu) | 4.757% (Mon) |
| Thirty-year, after Treasury doubled buybacks | 5.266% | 5.207% |
| Two-year Treasury, Monday | — | 4.348% |
The other side of the argument
Treasury Secretary Scott Bessent went on television Monday and, without predicting the Fed, listed reasons to hold: the inflation is a supply shock — tariffs, the Iran war, oil — and “traditionally you don’t raise… unless you see second or third-order effects.” The Treasury has also doubled its buybacks of long bonds, a program he has said plainly is meant to pull the thirty-year yield down from the 5.3% it touched in August. It worked a little: the thirty-year settled Friday at 5.207%.
So the two most important people in American finance are pulling on the same rope from opposite ends, in public, two weeks before the meeting. Analysts at the American Enterprise Institute said the speech “will be judged in light of the Fed’s decision” — if the Fed holds after talking like that, people will ask what changed.
What it means at your kitchen table
A hike lifts the yield on cash and short bills first; that is good news for anyone living on interest. It raises the cost of an adjustable mortgage and a credit card. It is quietly hard on the thing most people never look at: the bond fund inside a target-date account, which in many plans is a long-duration index fund that was built for a 2% world.
It is also, we would argue, boring in the right way. A central bank that does not pre-announce is a central bank you have to prepare for rather than predict. We prepare.