The US dollar has moved higher as Fed chair Warsh is more hawkish in his remarks. He remains reluctant to give forward guidance, but the market is pricing and around a 50% chance of a September hike which is up from the low 30s, but not near higher levels near 60 a month or so ago.
In the video above, I take a look at the technicals of the major currency pairs versus the US dollar and also a quick look at the major US stock indices. Included is:
- EURUSD
- USDJPY
- GBPUSD
- USDCHF
- USDCAD
- AUDUSD
- NZDUSD
Along with a look at the S&P and the Nasdaq composite indices.
The breakdown of his longer than expected speech (close to 30 minutes). I heard some before saying he would not be as long but the speech was 3,566 words. For your guide, Powell’s 2025 Jackson Hole speech was approximately 3,196 words
Monetary policy outlook
- Warsh said he is committed to a policy discipline, “not to a decision,” leaving upcoming rate decisions dependent on incoming information.
- He described economic activity as solid and strengthening, with little evidence that current financial conditions are broadly restrictive.
- Inflation remains the Fed’s predominant concern.
- The Fed must be confident that underlying inflation is returning to 2% “clearly and at sufficient speed.” Otherwise, policymakers still have work to do.
- Overall, the speech did not point toward an imminent rate cut and suggested the bar for easing remains high.
Inflation
- Headline PCE inflation stands at 3.7% year over year, while the six-month annualized rate is 4.1%.
- Core PCE and CPI measures are also elevated and continue to tell the same story: inflation remains well above the Fed’s 2% target.
- Warsh acknowledged that recent summer readings were better than expected but said they did not demonstrate a meaningful improvement in the underlying trend.
- Some 54% of the components in the PCE basket rose by more than 3% during the past year, compared with a pre-pandemic average of 32%.
- Over the past six months, 49% of PCE components increased at an annualized rate above 3%.
- Rising commodity prices represent another potential upside risk.
- Inflation expectations remain anchored, but Warsh warned that confidence can disappear quickly if the Fed fails to deliver.
- He placed responsibility for 65 months of elevated inflation squarely on the central bank.
Labor market
- Warsh characterized the labor market as stable and consistent with full employment.
- The unemployment rate remains historically low at 4.1% and has changed little over the past several years.
- Four-week average unemployment claims are near their lowest levels in decades.
- Slower monthly job creation partly reflects limited growth in the supply of available workers.
- Low turnover may also reflect the extensive matching of workers and employers following the pandemic.
- He acknowledged weakness among some groups, including recent graduates, but said people who want jobs are generally holding or finding work.
Economic growth and consumer spending
- Warsh said the economy has shown considerable resilience despite repeated shocks.
- Real consumer spending has risen by more than 2% over the past four quarters.
- Private domestic final purchases—a measure Warsh considers more informative than GDP—have grown at a nearly 3% pace this year.
- The combination of healthy consumption and strong business investment points to solid underlying domestic demand.
Business investment, profits and markets
- Business investment in equipment and intellectual property has increased by around 9% over the past four quarters, the fastest pace since 2021.
- More than half of this year’s capital-expenditure growth is likely related to the buildout of AI infrastructure.
- S&P 500 profits have risen by more than 20% over the past year, with profit margins remaining historically elevated.
- Equity-market volatility is low, while expectations for earnings and capital-spending growth remain high.
- Warsh said the Fed will watch whether the pace of those gains begins to accelerate or slow.
Financial conditions and credit
- Corporate and leveraged-loan credit spreads are near the bottom of their historical ranges.
- Debt issuance has been strong, while bank lending standards for commercial and industrial loans are comparatively easy.
- Credit and loan markets are showing few signs of restraint from monetary policy.
- Housing and agriculture are experiencing pressure, but Warsh said broad financial conditions cannot reasonably be described as restrictive.
Artificial intelligence and productivity
- Warsh described AI as a potentially new factor of production that could materially raise economic growth and productivity.
- Annualized token sales at the two leading AI laboratories reportedly exceed $100 billion, up more than 500% from a year earlier.
- The Fed is studying AI’s implications for productivity, employment, capital investment, market structure and monetary policy.
- Key questions include whether AI complements or replaces labor, how capital-intensive future models will become and who ultimately captures the economic gains.
- A Fed task force on productivity and jobs is examining these issues, although its work will not influence current policy decisions.
Forward guidance and Fed communication
- Warsh argued that routine forward guidance has “overstayed its welcome.”
- Forward guidance was useful during the 2008 financial crisis, but oversharing and making quasi-commitments can restrict the Fed’s flexibility.
- He suggested that the Fed’s 2021 guidance may have contributed to its delayed response to inflation.
- Warsh also rejected the idea of publishing a mechanical reaction function or predetermined interest-rate path.
- He favors a “quieter Fed” that communicates purposefully and avoids steering markets toward their next trade.
The Fed’s relationship with markets
- The Fed should use market signals—including Treasury yields, the dollar, commodity prices, credit conditions and trading volumes—to assess the economy.
- Markets, however, should develop their own expectations rather than relying predominantly on Fed guidance.
- If markets follow the Fed while the Fed follows markets, the result is a “hall-of-mirrors” problem that can distort signals and contribute to policy mistakes.
- Warsh argued that ordinary Americans, particularly those without substantial financial assets, bear the greatest cost when the Fed misjudges inflation or employment.
Warsh’s policy principles
- Monetary policy should focus on current trends rather than stale data or isolated reports.
- The Fed’s 2% PCE inflation objective is a firm and fixed target.
- Price stability and maximum employment are complementary over time, not competing objectives.
- Short-term interest rates should remain the Fed’s primary policy instrument.
- Unconventional policies should be reserved for genuine crises.
- Money supply, bank-created money and their effects on financial conditions and prices should receive greater attention.
- Fed credibility should be measured by results rather than communications or promises.
