Warsh cites resilient economy and insufficient inflation progress.
The odds of a September rate hike jumped to 59.5 percent from 35.5 percent yesterday on Fed Chair Kevin Warsh’s comments at Jackson Hole.
Not Done Fighting Inflation
The Wall Street Journal reports Warsh Says the Fed May Not Be Done Fighting Inflation.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he said in his first speech as Fed chairman, a highly anticipated debut at the Kansas City Fed’s annual symposium in Wyoming.
He described an economy showing few signs of restraint from the Fed’s current rate of around 3.6%. “Credit and loan markets are showing few signs of policy restraint,” he said. Despite some signs of strain in housing and agriculture, “on balance, I would be hard-pressed to describe broad financial conditions as restrictive.”
This summer’s readings “were better than expected,” Warsh said, but “they do not tell me that underlying trends have meaningfully improved.” He highlighted the breadth of price increases: About half the items in the Fed’s preferred inflation basket are rising faster than 3%.
Warsh set aside one of the better arguments for patience when he dismissed moderate growth in wages, which in the Fed’s conventional models is a sign inflation should be better behaved over time. Wage growth “has not proven a reliable indicator of future inflation for a very long time,” Warsh said.
Still, Warsh provided a more detailed reading of the economy than he has at earlier public engagements. “Today I am impressed by the overall performance of the economy, which appears to have strengthened,” he said, citing how well it has held up to shocks. He pointed to credit spreads near the low end of their historical range and business investment growing at its fastest pace since 2021.
Inflation Readings Not Better than Expected
The Personal Consumption Expenditures (PCE) price index was was not better than expected.
The BEA reported 0.2 percent but the consensus estimate was 0.1 percent.
This is despite the BEA reporting a 2.7 percent decline in gasoline that consumers did not see at the pump.
PCE Inflation on the Hot Side
On August 26, 2026, I commented PCE Inflation on the Hot Side, Lack of Progress in Pictures
Let’s discuss the Fed’s preferred measure of inflation and gasoline.
The “hot side” in the title is vs expectations. The Econoday consensus was 0.1 percent month-over-month and 2.6 percent year-over-year.
Actual data was higher.
PCE Above Fed’s Target
If you are a Trump or Fed apologist you are watching core CPI at a still high 2.5 percent and making excuses.
However, the PCE is the Fed’s preferred measure of inflation.
Year-over-Year PCE inflation has been over the Fed’s 2.0 percent target for 65 straight months since March 2021.
The Fed Will Get the Blame
No matter what happens now, the Fed is going to get the blame.
If the Fed hikes (as it should have long ago), and the stock market or economy tanks, the Fed will get the blame.
If the Fed does nothing, the bubble will keep brewing but will eventually pop. The Fed will get the blame for that too.
Resilient Economy or AI Bubble?
“I would be hard-pressed to describe broad financial conditions as restrictive,” said Warsh.
Indeed!
An obvious AI bubble is brewing, and the Fed ignored that.
It ignored the huge surge in credit fueling AI. And the Fed ignores off-balance sheet accounting that hides this debt and inflates earnings.
If the Fed does nothing, the bubble will keep brewing but will eventually pop. The Fed will get the blame for that too.
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You can’t increase exports if you are the highest cost manufacturer.
Tariffs increase costs. Both the US and Canada are doing this.
It is absurd to be in this spot, but here we are.
Same old, same old. Since T-Bill rates are up, the Fed will catch up as always! They do NOT lead, they follow.
so the Fed’s goal for inllation is 2% which is completely arbitrary in the first place and it has been running around 3% for years but they don’t see raising rates as a proper reaction to their mandate and yet Congress is completely silent on the topic
I think Chair Warsh is a master of talking about hiking interests rates in such a way as to be quadruple hedged so as to ultimately not do it. If the concern that Japan would liquidate a portion of their Treasuries sends the Administration into orgasmic frenzy, then is it not plausible that the Administration has a similar concern that private equity, who has aggressively moved in to fill the gap, will do the same if rates go up? It’s a reality that as foreign central banks have slowed their purchases of Treasuries, highly levered private equity, and not to mention fickle private equity, might turn to their most liquid holdings if things turn south? I think this Administration is actually fine with inflation running hot. I am not buying into the “Warsh is trending for higher rates” camp.
Kutsey Warsh, if you’re going to say it, why not just say it?
I still fail to understand how the AI bubble was missed by so many. Where’s the value it creates? No one can show you, but the people making money off of the high say it’s true so it must be!
As someone who works in the management of a company that is an end user of AI (so not an AI hater), I’d have to say most uses of LLMs are a total waste of time that creates no real value for the company. The hard truth is that no one wants to admit that many people have gotten scammed, and that our economy is resting on that scam being furthered.
The other shoe seen in the other article with CEOs trying to pay off democrats. Law breaking behavior has become normalized and instability like this is what you get out of that. If expecting companies to follow basic law and order is socialist, I’d wager most people are by extension. Bailing out banks in ’08 has set a precedent that businesses can do whatever they want and get off scotch free. Who could have thunk that was a bad policy?
AI has been around for 20 years or more, glorified search engines that can also help with basic offiilce tasks but still need to be managed. Back in the day it was called using templates to create reports. Today it is a multi-trillion dollar scam
Talk is cheap and a quarter point does not cost much more. A little slow down or long bond rates resume their climb, and my bet is he folds especially if there is trouble in financial land.
Of course we all wonder what is the magic rate that bursts the Ai Bubble?
Which event will bring the economy down?
Taco is not going to like this. Will be interesting to see if Warsh holds his ground or succumbs to the deranged clown.
Every day the same claptrap. NO president likes restrictor plates. Why don’t you tell me how many months of NONZERO rates we had under Obama. Now do Biden. Now do Trump. Neither Obama nor Biden had any reason to be deranged about lower rates, for much of their terms they were pegged at ZERO. Not 4.25, ZERO.
They were zero because we were digging out of the mess of the GWBush years, ie the last time we had insane tax policies, started crazy wars, and crashed the economy due to insane deregulation of the banks. Forgot about that?
CES benchmark revision slightly negative.
Probably not enough to derail a rate hike.
Not nearly as awful as the -900K on the last round.
I don’t know Mish, Walrus has 12 committees, councils, teams, and other “experts” looking into the problem of inflation. He may need a full two more years before they determine a path forward of a quarter point rate hike.
There is 100% certainty of this though:
Do worry, Trump, Walrus, GOP, and democrats will find a way to make things even worse.™
I saw recently you weren’t in the States, where in approximate terms did your exit strategy lead you?
I am mobile. In Europe at the moment, heading to Caribbean when it gets cold here then Asia in early 2027. I must admin, getting nervous at all the natural disaster chaos in Asia happening now: earthquakes, massive landslides, fires. Looks like whole towns got wiped out in Nepal but I also see a hurricane headed to east coast USA.