Fed Chair Kevin Warsh used his first Jackson Hole speech to set a new standard for inflation, demanding it return to target quickly. The added condition keeps the door open for further rate hikes even if inflation keeps easing, a stance that also puts a debt-financed, AI-driven stock market on notice.
Warsh sets a speed test for inflation
At Jackson Hole on Aug. 28, Fed Chair Kevin Warsh set a new standard for inflation: "underlying inflation is moving to our objective, clearly and at sufficient speed". It's the addition of "at sufficient speed" that shifts the Fed's focus away from being satisfied with month-over-month declines, demanding instead that prices moderate quickly.
Warsh, who was sworn in as Jerome Powell's successor on May 22, has held to his promise of a reform-oriented Fed ever since. He has shelved forward-looking guidance from FOMC meeting statements and commissioned five task forces to review how the central bank conducts monetary policy. Inflation has stayed above the Fed's 2% long-term target for 65 months and counting.
The door stays open for rate hikes
Warsh's standard leaves room for further rate hikes even if the prevailing inflation rate keeps declining. Between the June 17 and July 29 FOMC meetings, he had pointed out that a sizable rise in long-duration Treasury bond yields had already done some of the Fed's tightening work.
An AI-driven market faces a debt test
Warsh's standard also lands on a historically expensive stock market built largely on an artificial intelligence infrastructure build-out financed partly with debt. If lending costs rise, businesses could slow data-center spending even marginally, pushing investors to re-rate growth expectations and put AI valuations under closer scrutiny.
Tackling persistently high inflation may be necessary, but delivering on that promise "at sufficient speed" threatens to upend one of the strongest bull markets on record.
Source: Motley Fool
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