Last Friday's speech in Jackson Hole proved that Warsh has been able to "talk the talk" on the inflation issue. But whether he can truly "walk the walk" will be answered at the September FOMC meeting and the subsequent policy actions.

Source: Jin10 Data

Federal Reserve Chairman Kevin Warsh's speech at the Jackson Hole annual meeting last Friday temporarily eased market doubts about his policy stance. Rate traders quickly raised their expectations for a rate hike in September, and economists from Barclays, Société Générale, and Deutsche Bank have also included rate hikes in their September and December forecasts.

However, this "passing" is more due to the market's relief over Warsh reaffirming his anti-inflation stance, rather than a renewed recognition of his policy credibility. Reuters opinion columnist Jamie McGeever recently wrote that the real issue Warsh needs to face is how to prove with subsequent actions that this statement is not a one-time policy adjustment.

During the central bank annual meeting hosted by the Kansas City Fed in Jackson Hole, Wyoming, Warsh clearly stated his commitment to achieving the Federal Reserve's 2% inflation target. He also emphasized that the policy interest rate is the best tool for the Fed to achieve this goal, and he is willing to use this tool if the economic situation requires it.

This statement directly changed market pricing. The probability of a rate hike in September rose from about one-third before the speech to about two-thirds, and economists from Barclays, Société Générale, and Deutsche Bank have all since predicted that the Fed will raise rates in September and December.

The issue is that Warsh's speech is considered hawkish partly because his previous public statements left too many questions, especially the poor response to the news conference after the July Fed policy meeting.

Gregory Daco, chief economist at EY-Parthenon, pointed out that it took Warsh 100 days to clearly articulate his commitment to the Fed's 2% inflation target and his willingness to defend this target. For the Fed Chair, this should be a basic position, especially with the labor market, according to Warsh himself, already "consistent with full employment."

September Meeting: Warsh Will Soon Face the Test

With only two weeks until the next Federal Open Market Committee (FOMC) meeting, Warsh needs to face not whether his speech can stabilize the market, but whether policy action can align with the speech.

The three officials who voted to support a rate hike at the July meeting—Cleveland Fed President Harker, Dallas Fed President Logan, and Minneapolis Fed President Kashkari—are not isolated hawkish voices.

The minutes from that meeting showed that "several" participants supported a rate hike of 25 basis points, and "many" participants believed that further tightening may be needed in the future to bring inflation back to target levels.

Chicago Fed President Goolsbee and Kansas City Fed President Schmid emphasized last week in Jackson Hole that controlling inflation should be the central bank's top priority.

Boston Fed President Collins also stated earlier last week that the Fed may need to raise rates soon.

Fed Governor Barr said on Tuesday that he would be prepared to support a rate hike if inflation does not ease. He noted that inflation has stubbornly been above the Fed's 2% target for nearly five and a half years, and he is concerned that "broader price pressures are taking root." "If inflation does not appear to ease sufficiently, then I think we should decisively raise rates."

As a result, Warsh's position is thus closer to the emerging middle ground within the FOMC, rather than an isolated hawkish stance.

Going forward, economic data will become an important basis for deciding the September policy. If the Fed's decision is completely data-driven, the August non-farm payroll report to be released this Friday, along with the August CPI and PPI inflation data to be released next week, will be the focus of market attention.

McGeever wrote that unless these three data points show unexpectedly weak results, the obstacles to a rate hike in September will be relatively limited. Warsh himself also reminded that the Fed should observe economic trends, rather than being swayed by "isolated data points."

He also acknowledged that core inflation has not shown any "meaningful improvement" in recent months. If the rate market continues to strengthen expectations for a rate hike before the meeting, Warsh will have little reason to guide the FOMC to hold steady.

economists at Bank of America warned, "Otherwise, he risks damaging some of the credibility he managed to build up last Friday."

Trump's Call for Rate Cuts Still Pressuring from the Sidelines

There remains significant uncertainty regarding how Warsh will vote in September, with one unavoidable question being the political pressure from the White House.

Warsh has repeatedly stated that his policy decisions will not be influenced by the White House, but the market still finds it difficult to completely dispel doubts. Trump previously publicly and dramatically pressured Warsh's predecessor Powell, keeping investors' concerns over the Fed's independence alive.

Trump reiterated his long-held position on Monday that the Fed should cut rates. However, he simultaneously expressed that he has a great "respect" for Warsh and believes Warsh will "do what he has to do."

The conflict between political pressure and economic reality is not simple. According to a poll released by Reuters/Ipsos on Monday, Trump's approval rating has fallen to its lowest level in his political career; just ahead of the midterm elections on November 3, "the cost of living" is the issue most concerning voters, clearly ahead of other topics.

Trump obviously does not want to see rates rise further, but persistently high inflation and rising long-term borrowing costs will also increase pressure on the U.S. economy and households.

Since taking over from Powell at the end of May, Warsh has only had about three months to reach a point where he must prove the credibility of his policies. Particularly in the context of rising long-term bond yields, what he needs to rebuild is not just the market's confidence in a single speech.

Last Friday's speech in Jackson Hole proved that Warsh has been able to "talk the talk" on the inflation issue. But whether he can truly "walk the walk" will be answered at the September FOMC meeting and the subsequent policy actions.