Federal Reserve’s Warsh outlines data dashboard for US economy

Kevin Warsh marked his 100th day as Federal Reserve Chairman with a Jackson Hole keynote that read less like a traditional central bank speech and more like a pilot walking passengers through the cockpit instruments. Instead of offering the usual forward guidance on where rates are headed, Warsh outlined exactly which gauges he’s watching and why.

The dashboard

Warsh’s August 28 address introduced what he called a “trail map” for monetary policy. It’s built on seven principles, the most notable being a hard commitment to a 2% inflation target and a preference for short-term interest rates as the Fed’s primary tool.

That 2% target matters because the current numbers aren’t close. PCE inflation, the Fed’s preferred price gauge, is running at 3.7% year-over-year. Zoom into the past six months and the annualized rate climbs to 4.1%. Roughly half of all PCE components are running above 3% on an annualized basis.

On the labor side, unemployment sits at 4.1%, a level Warsh characterized as consistent with full employment.

Perhaps the most interesting data point: business capital expenditure is climbing at roughly 9% on a four-quarter basis, with more than half of that spending tied to artificial intelligence investments.

Real-time over rearview mirrors

The philosophical shift in Warsh’s approach centers on timing. He signaled a preference for real-time economic indicators over the traditional monthly data releases that often arrive weeks or months after the fact.

Warsh also noted that current financial conditions show “few signs of policy restraint” despite elevated inflation. Translation: even with rates where they are, the economy doesn’t seem to be feeling much squeeze. That observation alone suggests the Fed chair sees room for tighter policy if the data warrants it.

What markets heard

Wall Street’s reaction landed somewhere between cautious and nervous. Analysts broadly characterized the speech as hawkish in tone but moderate in intensity. Warsh didn’t pound the table for imminent rate hikes, but he also didn’t close the door.

Bond traders are now pricing in elevated odds of a rate hike as early as September, though nothing is certain under Warsh’s new framework.

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