Kevin Warsh Faces Fed Inflation Divide At Jackson Hole: Stephen Miran Says A Rate Hike Now Would Be ‘Really Strange'

• The Fed’s July FOMC meeting produced a 9-3 vote to hold rates at 3.50%-3.75%, with Beth Hammack, Neel Kashkari and Lorie Logan dissenting in favor of a 25-basis-point hike.
• According to Kansas City Fed President Jeffrey Schmid, inflation is “still stubborn and it’s still sticky.”
• Schmid said he does not know “what we’re restricting” with the current policy rate.

Kevin Warsh heads into his first Jackson Hole speech with the Federal Reserve facing a clear divide over how aggressively to respond to elevated inflation, with three FOMC members pushing for a rate hike at last month’s meeting.

According to former Fed Governor Stephen Miran, it would be “really, really strange” to start hiking rates just as inflation data are potentially headed for downward revisions, given that the Bureau of Economic Analysis (BEA) is poised to overhaul how it calculates price for the Personal Consumption Expenditures (PCE) index in September.

“It would be a really really strange thing to start hiking, just as the data are going to be revised down by a lot,” Miran said in an interview with CNBC. 

At the Fed’s July meeting, the FOMC voted 9-3 to keep the federal funds target range at 3.50%-3.75%. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissented, preferring a 25-basis-point increase. 

Cleveland Fed Sees Inflation Requiring Action

“I believe now is the time to act,” said Cleveland Fed President Beth Hammack in an interview with CNBC. “I don’t see any restriction in policy when I look at financial conditions.” 

She pointed to businesses willing to borrow and raise capital, record debt issuance and large IPOs. She also warned that prolonged inflation could create an “inflationary mindset” among households and businesses.

Her comments are consistent with her July FOMC dissent. Hammack, along with Kashkari and Logan, wanted the Fed to raise rates by 25 basis points rather than hold them steady. The other nine voting members, including Warsh, supported keeping rates unchanged.

Kansas City Fed President Jeff Schmid was similarly skeptical that monetary policy is restrictive enough. Smith, who dissented on the Fed’s last two 25-basis-point rate cuts, said inflation is “still stubborn and still sticky.”

“I don’t think a lot’s changed since the Q4 of last year,” Schmid said, adding that the Fed may be “more accommodative than restrictive” with its current policy rate.

Warsh Faces A Policy Debate, Not Just A Rate Decision

The latest PCE data showed the challenge that lies ahead for the new Fed chair. The headline PCE price index rose 0.2% in July from the previous month, while core PCE also increased 0.2%. On a year-over-year basis, headline PCE was up 3.7% and core PCE rose 3.3%.

The overall market was trending higher on Thursday, with the SPDR S&P 500 ETF (SPY) gaining 0.75%, the SPDR Dow Jones Industrial Average ETF (DIA) up 0.37%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) moving 1.2% higher. 

The rally came after Nvidia’s second-quarter earnings beat expectations, with some on Wall Street expecting the company’s market value to exceed $12 trillion over the next 12 months. 

The keynote speech by Warsh is scheduled for 10:00 a.m. Eastern Time (ET) on Friday. While no rate changes are announced at Jackson Hole, it’s the Fed’s premier annual policy forum where the chair and other central bankers use speeches to signal the direction of U.S. monetary policy between FOMC meetings.

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