This has been a history-packed year for Wall Street, with the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) romping to new highs, and the largest-ever initial public offering taking shape. But the swearing in of Fed Chair Kevin Warsh on May 22 arguably takes the cake.
Jerome Powell’s successor vowed to lead a reform-oriented central bank and hasn’t veered from that promise over the last three months. Since taking the reins, Warsh has shelved forward-looking guidance from Federal Open Market Committee (FOMC) meeting statements and commissioned five task forces to aid the Fed in its conduct of monetary policy.
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Fed Chair Warsh just served up an inflation ultimatum for Wall Street. Image source: Official Federal Reserve Photo.
But the biggest task at hand for Warsh and the FOMC is tackling persistently high inflation. While delivering his first annual speech at the Jackson Hole economic symposium on Aug. 28, the new Fed chair completely shifted the central bank’s entire focus on inflation in one sentence.
Kevin Warsh just flipped the script on inflation
Aside from several reforms, the most consistent message of Warsh’s early tenure has been that the Fed would “deliver price stability.” Warsh and his colleagues recognize that the prevailing inflation rate is well above the Fed’s long-term 2% target and has been above this line in the sand for 65 months (and counting).
Between the June 17 and July 29 FOMC meetings, the head of the Fed pointed out that a sizable increase in long-duration Treasury bond yields had effectively done some of the work for the central bank. Higher bond yields at the long end of the yield curve can raise borrowing costs and temper above-average inflation.
However, Fed Chair Kevin Warsh made clear at Jackson Hole that the Fed’s primary focus is on prices. More specifically, he outlined the importance that inflation not only decline to the FOMC’s long-term target, but that it does so in a timely manner:
Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.
It’s the addition of “at sufficient speed” that really shifts the Fed’s inflation focus away from simply being satisfied with month-over-month declines and demanding that prices moderate to acceptable levels rather quickly. This one sentence from Fed Chair Warsh leaves the door wide open for rate hikes, even if the prevailing inflation rate declines.