Warsh Ends Fed Forward Guidance as PCE Inflation Holds at 3.7%

Kevin Warsh marked his 100th day as Fed chairman by scrapping forward guidance, leaving Wall Street to price rates on its own.

Federal Reserve Chairman Kevin Warsh used his Jackson Hole address to end reliance on forward guidance, telling markets to read data themselves as inflation runs at 3.7 percent.

"Forward guidance as a regular practice was adopted by my colleagues—and me—during the global financial crisis... I believe the practice has outstayed its welcome," Warsh said in prepared remarks, adding that the Fed "should not indulge a regime in which market participants are looking primarily to the Fed for their next trade."

Gold fell about 1 percent during the speech, the VIX slipped 1 percent, and longer-dated Treasury yields eased. The CME FedWatch tool showed 57 percent of traders pricing a quarter-point hike to 3.75 percent at the Sept. 15-16 meeting.

The shift forces investors to reassess rate expectations without the Fed's verbal cues, a departure from the pre-crisis era Warsh wants to restore. With the 12-month PCE at 3.7 percent and the six-month pace at 4.1 percent, the risk is that markets misprice the path back to the Fed's 2 percent target.

Warsh, in his first Jackson Hole appearance since taking office in May, avoided committing to a reaction function—the economic signals that would warrant a rate move—even as he acknowledged inflation remains well above target. "While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved," he said. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

The remarks mark a deliberate break from his predecessors. At last year's symposium, then-Chairman Jerome Powell hinted at rate cuts ahead, setting off an aggressive rally on Wall Street. Warsh, by contrast, has established five task forces to review Fed operations across communications, balance-sheet policy, data, productivity and jobs, and inflation frameworks, staffing each with outside academics and business figures.

Markets Left to Gauge the Path to 2 Percent

The absence of guidance complicates the Treasury's parallel effort to manage the debt market. Treasury Secretary Scott Bessent this week unveiled a plan to expand the department's weekly debt-buyback program to at least twice its normal size starting Sept. 9, a move that runs counter to Warsh's preference for less government involvement in markets.

"We're in a unique set of conditions here, where actions by the Treasury have undermined Warsh's move. Therefore, the Fed chair is in between a rock and a hard place," said Joseph Brusuelas, chief economist at RSM.

The fed funds rate has sat at 3.5 percent to 3.75 percent since Warsh's first Federal Open Market Committee meeting in July, where he held policy steady. Economists are split on what comes next. Mark Cabana, head of U.S. rates strategy at Bank of America, cautioned that a speech confined to big-picture topics—without indicating that hikes remain on the table—risks being read as dovish, potentially pushing the 30-year Treasury yield to 5.5 percent or above.

Eric Winograd, chief U.S. economist at AllianceBernstein, said the speech "corrected a couple of mistakes he made at his last press conference, reinforcing that PCE is the target measure for inflation and that interest rates are the Fed's primary tool," calling the remarks "hawkish compared to his last remarks."

Warsh also flagged artificial intelligence as a new variable for policy. "Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?" he asked, noting the question would be taken up by his task force on productivity and jobs.

A Discipline, Not a Decision

Warsh framed his approach as a return to a quieter central bank. "I stand here today committed to a discipline, not to a decision," he said. "So much depends on choices we make. Sound monetary policy helps households and businesses to prosper."

The 65 months of elevated inflation, he said, "sits squarely with the central bank. And that is where it belongs." The admission shows the stakes: with the six-month PCE running at 4.1 percent, the Fed has yet to demonstrate it can return inflation to target without the market hand-holding that defined the post-crisis era.

For investors, the practical effect is a wider range of possible outcomes. If the data stay hot, the September meeting could deliver the quarter-point hike that 57 percent of traders now price. If the summer's softer readings prove durable, the Fed could hold again—leaving markets to discover the path on their own.

This article is for informational purposes only and does not constitute investment advice.