Clarida believes Warsh’s statement that the Fed has ‘work to do’ is the key message from his speech.
- Warsh reaffirmed that the Fed’s 2% PCE inflation target is fixed and said policymakers must bring inflation back to that level.
- Following Warsh’s remarks, the probability of a 25-basis-point rate hike in September jumped to 61.7% from 35.4% on Thursday, according to the CME FedWatch tool.
- The probability of a 25-basis-point rate hike in September jumped to 61.7% from 35.4% on Thursday, according to the CME FedWatch tool.
Former Federal Reserve Vice Chair Richard Clarida believes that every meeting, including September’s, is live when asked about the possibility of a rate hike by the central bank.
“I think every meeting, including September, is live, but I also think that’s about as much as we’re gonna get out of the chairman in terms of his reaction function, that there may be work to do,” he stated in an interview with Bloomberg on Friday.
Clarida’s comments followed Warsh’s first keynote address as Fed chair at the Jackson Hole Symposium on Friday. Inflation has remained above the central bank’s target for 65 consecutive months.
Clarida said Warsh’s acknowledgment that the Fed still has “work to do” was the most important line from the speech.
Warsh said the Fed must see clear and sufficient progress toward its inflation target, adding that policymakers will have “work to do” if that improvement does not materialize. “I think the work to do quote is the money quote, and I think that it delivered the reaction that the chair wanted in particular,” Clarida said.
The 2% Inflation Target
Warsh said the recent improvement in inflation was not enough to convince him that price pressures were easing in a lasting way. “While this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved,” Warsh said in his prepared remarks.
He reaffirmed that the Fed’s 2% PCE inflation target is fixed and said policymakers must bring inflation back to that level. The Personal Consumption Expenditures (PCE) Index, which is the Federal Reserve’s preferred gauge of inflation, was up 3.7% year-over-year, as per the latest data.
While Warsh wants better economic measurements and forecasts, Clarida said the Fed chair does not appear interested in changing the inflation target.
“The chairman wants better measurements and better forecasts, but he made clear that the target by which the Fed will be judged is the existing target, which is 2% PCE inflation,” Clarida added.
CME FedWatch Data Shows Rate Hike Probability Jumps
Following Warsh’s prepared remarks, the probability of a 25-basis-point rate hike in September jumped to 61.7% from 35.4% on Thursday, according to the CME FedWatch tool.
The overall market was mixed, with the SPDR S&P 500 ETF (SPY) down 0.1%, the SPDR Dow Jones Industrial Average ETF (DIA) edging 0.04% higher, and the Invesco QQQ Trust (QQQ) falling 0.5%. Retail sentiment for QQQ on Stocktwits remained ‘bearish’ over the past 24 hours.
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