The Fed Turned Credible at Jackson Hole, Not Hawkish

• Fed Chair Warsh’s Jackson Hole speech was labeled a hawkish pivot.

• Warsh said nothing new.

• Instead, he focused on restoring Fed independence and credibility.

Last week, I set the stage for Federal Reserve Chairman Kevin Warsh’s keynote speech at the Federal Reserve Bank of Kansas City’s Annual Economic Symposium in Jackson Hole, Wyoming. I noted that when all was said and done, we really weren’t going to hear anything new from our central bank chief. But I did note that no matter what he said, the media was going to spin it as hawkish (inclined to raise interest rates).

And right on cue, the financial press sounded the alarm. Bloomberg's news desk framed it as Warsh having "Put Inflation Fight First," while a Bloomberg Opinion columnist went further, arguing the Fed chair "Must Raise Rates." CNBC said he'd "sharpened" his inflation warning while "signaling" a possible rate hike, and Fox Business didn't bother hedging, calling it a flat-out hawkish stance. True to that read, the Chicago Mercantile Exchange's FedWatch Tool shows Wall Street's rate expectations shifting toward tighter policy before year-end, and stocks slipped into the weekend as traders priced in higher odds of a hike…

Yet, Warsh didn't really tell us anything new. For all intents and purposes, the Fed Chair noted the labor market remains resilient, the broader economy has held up well, and that he and his colleagues remain committed to bringing inflation back to the central bank's 2% target. That's the same message we've heard across the years from his predecessors Jerome Powell and Janet Yellen.

So, if the substance wasn't new, why the selloff? I'd argue the market's kneejerk reaction missed the more important signal buried in the speech: credibility. Throughout his remarks, Warsh reminded us that the Fed stands ready to act if persistently high inflation continues to erode consumer confidence. In doing so, he eliminated the lingering question of whether the central bank was actually willing to do what's necessary to defend its 2% target. That's not a reason for stocks to fall. It's a reason for the uncertainty premium that's been weighing on equities to come out. Once Wall Street gets past the initial hawkish headlines, removing the policy overhang should ease investors' price-stability worries and underpin a stead, long-term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…  

Let’s start with the inflation backdrop driving this. The current annualized CPI growth rate is 3.4%. But the real story isn't the headline number, it's how we got here. The stretch from March through May alone accounts for 2.5 percentage points of the 3.4% total. The other nine months combined? Just 0.9%, or roughly 0.1% monthly growth on average.

In other words, inflation ran hot for one stretch of the year. Everything else has been remarkably tame. The development is encouraging on its own. But it also means a central bank looking for room to cut rates must be patient. Those hot spring prints need to roll off the trailing twelve-month total before the annualized number can meaningfully improve. That's the math Warsh is staring at, and it's exactly why he needed to sound tough now instead of waiting.

Here's where it gets interesting: he didn't reach for the old playbook. Look at the balance sheet chart above. After ballooning to nearly $9 trillion during the pandemic response, the Fed has spent three years quietly running it back down, and only recently has that line leveled off near $6.7 trillion instead of climbing back toward crisis-era levels.

The one exception, a brief 2023 uptick during the regional-bank stress, proves the rule: the Fed reached for its extraordinary toolkit only when a genuine crisis demanded it, then went right back to shrinking its footprint. Warsh said as much, calling unconventional policy something that "may suit genuine crises but should otherwise be used sparingly, if at all," and naming short-term rates, not the balance sheet, as "the predominant tool" for the Fed's dual mandate.

That's the real story. With capex expected to grow near 17%, corporate profits up more than 20%, and unemployment holding at a low 4.1%, Warsh doesn't see an economy that needs life support. He sees one healthy enough to be managed with a scalpel, not a sledgehammer. Extraordinary measures were the right call in 2008, 2020, and briefly in 2023. They're not the right call now, when the problem is a temporary inflation blip, not slow growth.

Put it together, and Warsh's Jackson Hole speech wasn't a pivot. It was a confirmation. The Fed isn't reaching for new tools, and it isn't backing off its inflation fight. The Fed chief just told Wall Street, in plain terms, the central bank still knows how to do its job. Markets read that as hawkish because a central bank willing to act always sounds tougher than one that stays quiet.

Once the noise fades, that same clarity is what lets investors price risk with confidence again. That's the setup heading into the fall. It’s not a Fed spoiling for a fight, but one finally showing its hand. The shift should underpin a steady rally in the S&P 500 Index.

Five Stories Moving the Market:

The U.S. is set to take majority control over a huge amount of Venezuela’s oil wealth in a maneuver officials said would create the world’s second-largest private oil company by reserves and secure American petroleum supplies for decades to come – Bloomberg. (Why you should care – reconstruction of Venezuela’s oil industry will take some time but should eventually boost global output, weighing on prices and inflation growth)

U.S. Treasury Secretary Scott Bessent faces a major test of his economic diplomacy skills this week as he presses finance leaders from the G20 major economies to shrink global trade imbalances, boost ​growth, and sever business ties to Iran – Reuters. (Why you should care – further isolation of Iran would be part of efforts to get the country to agree to the June memorandum of understanding)

Lines of cars waiting to fill up at Iran’s gas stations, even in the middle of the night, have become a common sight in recent weeks, as war and a U.S. blockade have strained fuel supplies; the Iranian government is struggling with how to respond and is wary of reducing expensive subsidies, a move that would raise fuel prices and that has prompted large-scale protests in the past – NY Times. (Why you should care – rising economic pressure on Tehran could place increasing pressure on the government to strike a deal with the U.S.)

Federal Reserve Chairman Kevin Warsh signaled the central bank may not be done fighting inflation with higher interest rates; the remarks were his most substantive since he took over this spring – WSJ. (Why you should care – a 25-basis point rate hike this fall would ease speculation as to whether the Fed will tighten monetary policy)

Bank of England Governor Andrew Bailey said he still saw little sign ​that the recent surge in energy prices was creating serious longer-term inflation pressures in Britain; Bailey highlighted a soft ​labor market as one factor restraining inflation – Reuters. (Why you should care – Bailey’s comments are likely a signal that the Bank of England is unlikely to raise interest rates in the immediate future)

Economic Calendar:

U.K. - Markets Closed (All Day)

China - Official Manufacturing, Non-Manufacturing, Composite PMI for August (Sunday)

Japan - Industrial Production, Retail Sales for July (Sunday)

Germany - CPI for August (8 a.m.)

U.S. - Chicago PMI for August (9:45 a.m.)

U.S. - Dallas Fed Manufacturing Index for August (10:30 a.m.)

Treasury Auctions $92 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $79 Billion in 26-Week Bills (11:30 a.m.)

South Korea - Exports, Imports for August (8 p.m.)

Japan - Au Jibun Bank Japan Manufacturing PMI (Final) for August (8:30 p.m.)

China - Caixin Manufacturing PMI for August (9:45 p.m.)