Everyone Seems to Have Missed the 13 Most Important Words in Kevin Warsh’s Press Conference About Hiking Rates

The Federal Reserve raised its benchmark rate on Wednesday, and the morning-after story wrote itself. Reuters led with stocks pulling back after the Fed raised rates and pointed to another hike this year. Kevin Warsh said the plain fact is that inflation is too high and has been for too long , and that he would be hard-pressed to describe broad financial conditions as restrictive and that the Committee had removed a dose of accommodation. A UBS research note led by economist Jonathan Pingle called that phrasing much stronger wording than the market expected.

What most coverage skipped came in the final exchange. Jennifer Schonberger of Yahoo Finance asked whether the Fed now needs to push growth below potential and unintentionally push weakness onto the job market to bring inflation down. Warsh's answer: First, we believe that the unemployment rate is basically running consistent with full employment. I don't believe that we need to do harm to the labor markets to achieve our objective, according to Federal Reserve. I don't believe that the two parts of our mandate, price stability and full employment, are working at cross purposes over the medium term.

That answer arrived at the very end of the press conference, after most deadline copy was already framed around the tightening move. Warsh is saying he does not accept employment damage as the price of bringing inflation down.

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Warsh described a unanimous Committee that voted to raise the target range by a quarter percentage point, to 3¾ to 4 percent. The Summary of Economic Projections shows a median path of real GDP growth of 2.3% this year and 2.4% next year, with total PCE inflation at 3.7% this year falling to 2.3% next year, and a median appropriate policy rate of 4.1% at year-end. Warsh said those are his colleagues' views and that he has not offered a projection of his own, while restating the Committee's 2% goal. He also said inflation risks skew to the upside while labor risks are roughly balanced, and, citing a 4.1% jobless rate along with rising job openings and hours, called the labor side of the mandate in good shape.

UBS's Pingle argues Warsh's policy response function has shifted substantially versus prior Fed chairs: more sensitive to financial conditions, less sensitive to the labor market, and setting a higher threshold for restrictive policy. Warsh's thirteen words concern whether he treats labor-market harm as an acceptable cost of disinflation. Both can be true at once. A chair can down-weight labor softness in his reaction function while also refusing to accept job losses as the toll for hitting 2%, according to Federal Reserve.

In July, Warsh told reporters he does not believe either part of the mandate is generally at war with the other, and that price stability and full employment is not an either-or proposition, and that the way to do the most harm to labor markets is to run high and variable inflation that leaves employers unable to plan. The market reaction reflects genuine uncertainty about whether more hikes are coming. On whether Warsh is willing to break the labor market to get there, he answered Schonberger directly, and the answer deserves to be read in full.

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Source: https://finance.yahoo.com/economy/policy/articles/everyone-seems-missed-13-most-160619465.html