Warsh Says Fed Could Have ‘Work To Do’ If Inflation Doesn’t Trend Down. Chances Of a Rate Hike Increased.

Chances of a rate hike by the Federal Reserve increased by more than 10 percentage points on Friday after chairman Kevin Warsh's speech, according to the CME Group's FedWatch tool.

Concretely, chances now stand at 45.7%, compared to 35.4% on Thursday. Chances that the central bank will keep rates unchanged are still above 50% clocking in at 45.7%.

Warsh said on Friday that even though recent inflation readings have been "better than expected, they do not tell me that underlying trends have meaningfully improved." He claimed that if the trend doesn't move down in the future, the central bank will have "work to do."

However, he did not offer guidance about the central bank's next moves, speaking against "oversharing" policy deliberations.

Speaking in the Fed's annual symposium in Jackson Hole, Warsh said forward guidance "has overstayed its welcome" and "should not indulge a regime where market participants are looking at the Fed for their next trade."

Warsh went on to propose an "explicit reaction function" noting that the Fed chair "should tell us his interest rate path—if, say, the data were to come in hot or cold."

However, he then issued a warning: "our knowledge just doesn't extend that far—at least not yet—and the factors most relevant to the proper conduct of monetary policy change over time."

"In my term as Chairman, my colleagues and I will endeavor to construct more reliable models and more robust rules to guide policy decisions. We'll do this knowing that accuracy in economic forecasting is still just an aspiration. With so much changing so fast in geopolitics, global supply chains, and technology, it's wise to be modest about what we can and cannot know," Warsh added.

Elsewhere, Warsh expressed confidence in the economy, saying it "appears to have strengthened." He also lauded economic benefits from AI and said business and consumer spending has held up.

Stocks were barely changed after the remarks. The S&P 500 edged down 0.04% at 10:58 a.m., while the tech-heavy Nasdaq Composite gained 0.15%.