Mohammed El-Erian Says Kevin Warsh Faces Jackson Hole Balancing Act Between ‘Reaction Function’ And ‘Original Secular Spirit’

• According to El-Erian, one camp wants Warsh to outline his near-term “reaction function” and provide forward guidance on monetary policy.
• Another wants Warsh to return to Jackson Hole’s “original secular spirit” by focusing on longer-term economic and structural forces.
• Recent inflation data could increase the importance of any comments Warsh makes about the Fed’s policy reaction function.

Mohamed El-Erian, the chief economic adviser at Allianz, said on Friday that Kevin Warsh’s first Jackson Hole speech as Federal Reserve chair will test whether he follows his predecessors with a near-term “reaction function” or keeps with the gathering’s “original secular spirit.”

In a post on X, El-Erian described two competing visions for what Warsh’s Jackson Hole speech should accomplish.

U.S. equities were mixed in early morning trade on Friday. The SPDR S&P 500 ETF (SPY) edged 0.07% higher, the SPDR Dow Jones Industrial Average ETF (DIA) gained 0.18%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) fell around 0.10%. Retail sentiment around SPY on Stocktwits improved to ‘bullish’ from ‘neutral’ territory over the past day.
 

Warsh Faces Two Very Different Sets Of Expectations

According to El-Erian, Warsh faces a “delicate balancing act.” Not only does the new Fed chair have to navigate high expectations, but also a very varied set of expectations. 

There are those who want Warsh to follow the precedent set by recent Fed chairs by laying out his near-term “reaction function” and providing some forward guidance on how policymakers are likely to respond to incoming economic data.

On the other hand, rather than focusing on the next policy meeting, Warsh could use the speech to examine the structural forces reshaping the economy, such as the ramp-up in AI spending or the impact of the U.S.-Iran war. 

One approach gives markets a clearer view of where rates may be headed next, while the other offers a broader assessment of where the economy itself is headed.

Warsh Will Leave ‘Some Unsatisfied’

El-Erian said the balancing act would be “difficult to strike” and “almost certain to leave some unsatisfied.” He added that the challenge is also complicated by policy issues outside the Fed’s direct mandate.

Regardless, the keynote at Jackson Hole is “bound to tell us a lot about the new Chair,” El-Erian wrote.

Inflation Keeps Rate Outlook In Focus

Data released earlier this week showed the Personal Consumption Expenditures (PCE) price index rising 0.2% in July from the previous month. Core PCE, which excludes food and energy prices, also increased 0.2%. On a year-over-year basis, headline PCE rose 3.7%, while core PCE increased 3.3%.

Cleveland Fed President Beth Hammack, who dissented at the last Federal Open Market Committee (FOMC) meeting in July, stated on Wednesday that prolonged inflation could create an “inflationary mindset” among consumers and households.

However, former Fed Governor Stephen Miran said that it would be “really, really strange” for the central bank to start hiking rates just as inflation data are potentially headed for downward revisions. 

The Bureau of Economic Analysis (BEA) is poised to overhaul how it calculates prices for the Personal Consumption Expenditures (PCE) index in September.

El-Erian said his preference is tilted toward the “longer-term secular side,” particularly given the “current division among his FOMC colleagues.”

Read also: Bitcoin Is A ‘Barometer Of Excitement’ For Crypto, But Not The Whole Story: BitGo CEO

For updates and corrections, email newsroom[at]stocktwits[dot]com.