Today, Fed Chair Kevin Warsh gave his much-anticipated Jackson Hole speech, which I previewed in today’s episode of the HousingWire Daily podcast with Editor-in-Chief Sarah Wheeler. My primary take from the speech is that Warsh will vote for a rate hike if inflation data doesn’t improve and labor data is stable.
My main concern with Warsh is that at some point the Fed will have enough votes to hike rates, and if he doesn’t go along with them, markets will always see him as a Trump puppet. At that point, markets will look to Beth Hammack as the Fed Chair, which wouldn’t be good for the relationship between the Fed and the markets. For now, after this speech, I believe Warsh will vote for a rate hike if there are enough votes.
The market has already priced in rate hikes on the long end, so not much is happening right now; currently, the 10-year yield is at 4.72%. So the question is: where do we go from here? I want us to focus less on Kevin Warsh and the Fed and more on what actually matters for rates.
1. The Iran conflict has to come to an end or at least not get worse
The Fed hawks have made the Iran conflict a very big talking point of being hawkish, and it’s still going on, so if you want lower rates and better inflation data, the conflict has to end or at least not get worse, with oil prices below $82. I believe the fear of the conflict escalating has the hawks nervous and oil and diesel prices need to come down to alleviate that.
In fact, President Trump’s own economic talking point before the conflict was that if oil prices fall, everything will go down with them. I believe a range of $67-$82 will work; we are currently a tad above that, but just the threat of more escalation and no deal will always make the Fed more hawkish.
2. The trade war can’t get worse
The Fed recently wrote a paper on tariffs and their impact on the economy where they analyzed 125,000 US households’ transactions to measure how the 2025 tariffs affected spending. “Tariffs passed through 15-20% to retail prices, raising affected-good prices 1-2% but households cut spending by 4%, 3 to 4 times the price increase.”
The Federal Reserve was going to let trade-war inflation pass through the economy this year and still provide two to three rate cuts as the year started. This was also because labor data was softening toward the end of last year. However, inflation data worsened before the iran conflict, which forced the hawks to get more hawkish. I am sure that the Fed hawks are not thrilled that we started another trade war with Canada, one of our biggest trading partners.
In any case, inflation needs to improve, and the trade war getting worse isn’t going to get the Fed hawks to stand pat. The Fed really wants PCE inflation to head back toward 2%, and it’s not there yet. The PCE inflation data doesn’t have the big shelter disinflation factor, so it will be harder to get this back down without Trump working toward that progress.
3. Labor data still matters
Fed hawks and the Fed in general have said they don’t mind low job growth because the labor force isn’t growing. The bond market has taken notice and traded yields properly on this premise. The unemployment rate is 4.1%, and jobless claims data is historically very low. If anything changes with this premise, some of the Fed members will not vote for a rate hike, and therefore the worst in pricing and rates is already here. You can have some room to go lower in yields if labor softens up.
Conclusion
I am not a fan of Kevin Warsh as Fed chair, but today I did get the sense that he understands the concerns of the hawks, and at least if there was a unanimous vote to raise rates, he would join the vote. However, we need to move past Warsh and focus on what matters; two of the three concerns above are things in the Trump administration’s control, and one isn’t, so they have a lot of work to do to get rates lower.