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Kevin Warsh just delivered the speech that markets had been nervously waiting for. In his first Jackson Hole keynote as Federal Reserve Chairman, Warsh put inflation front and center, citing a headline PCE rate of 3.7% year-over-year for July and making it abundantly clear that the Fed’s 2% target isn’t a suggestion.
Markets heard the message. Post-speech, the probability of a rate hike at the upcoming September FOMC meeting jumped to roughly 50-60%, a sharp increase from where odds had been sitting before Warsh took the stage.
The numbers behind the hawkish tone
The Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, came in at 3.7% year-over-year for July. That alone is nearly double the central bank’s target. But the six-month annualized change paints an even less comfortable picture at 4.1%, suggesting price pressures may actually be accelerating rather than cooling.
Perhaps the most striking data point: over 54% of PCE components increased at an annualized rate above 3% over the past year.
Warsh described the Fed’s 2% PCE target as a “firm, fixed target,” language that leaves very little room for the kind of creative reinterpretation some market participants had been hoping for.
The 2% PCE target is a “firm, fixed target.”
He acknowledged that some recent readings have shown modest easing trends. But he was careful to distinguish between directional improvement and actual progress toward price stability.
A new sheriff with a different playbook
Warsh succeeded Jerome Powell as Fed Chairman in late May 2026, and this Jackson Hole appearance on August 28 represents the clearest articulation yet of how his leadership will differ from his predecessor’s.
One notable departure: Warsh advocated for a more restrained approach to forward guidance. Under Powell, the Fed leaned heavily on telegraphing its intentions to markets, sometimes months in advance. Warsh’s view is that explicit forward guidance should be reserved for crisis situations, not deployed as a routine communication tool during normal monetary policy operations.
This speech also marks something of a course correction from Warsh’s July press conference, which left market participants unsure about the chairman’s true policy leanings. The ambiguity from that earlier appearance has now been replaced with a message that’s hard to misread: inflation is too high, the target is non-negotiable, and the tools to address it remain on the table.
What this means for markets and the September decision
The surge in rate hike expectations to the 50-60% range reflects a meaningful shift in how markets are pricing the near-term policy path. Before Warsh’s speech, there was a credible argument that the Fed might hold steady through the fall, waiting for more data before making any moves.
The broader question is whether 3.7% PCE inflation represents a plateau or a waypoint. If the six-month annualized rate of 4.1% proves to be the more accurate signal, the Fed may need to do more than a single rate hike to bring prices back toward target. Warsh’s language suggests he’s prepared for that possibility, consistent with his stated preference for less forward guidance.
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