Worsh "hawkish," Goldman Sachs still does not believe in a "rate hike in September," while JPMorgan Chase states, "We still need to see the August non-farm payrolls and CPI."

Federal Reserve Chairman Kevin Warsh made his first appearance as chairman at Jackson Hole, signaling a more hawkish stance than during the July FOMC press conference: inflation is "worrisome," and the Fed's current "primary focus should be on prices." If the underlying trend in inflation does not decrease to the target "at a sufficient pace," "we have work to do." After his speech was released, the yield on 2-year U.S. Treasury bonds jumped about 7 basis points, marking one of the largest market reactions following a Jackson Hole speech in recent years. At the same time, the probability of a rate hike in September rose from about 30% prior to the speech to over 50%. However, two major Wall Street banks did not follow the market's pricing shift. JPMorgan maintained its baseline forecast for a December rate hike, with economist Michael Feroli stating that the "more important news" influencing the outcome of the September meeting would be the upcoming August non-farm payroll and CPI reports. Goldman Sachs projected that the month-on-month increases in core CPI and core PCE for August would both be around 0.2%. Based on this trajectory, the FOMC is likely to stay put. Inflation is a "primary concern": substantial improvement in the underlying trend is not yet evident. Warsh dedicated a significant portion of his speech to inflation. He acknowledged that the PCE and CPI readings this summer were "better than expected," but he quickly added, "That doesnt tell me that the underlying trend has improved significantly." He presented data to support his argument: over the past 12 months, 54% of the goods and services in the PCE basket saw price increases exceeding 3%, down from the pandemic peak of about 77%, but still well above the 32% level seen in the twenty years prior to the pandemic. JPMorgans Feroli noted that this measure is "less cherry-picked" compared to the trimmed-mean PCE, which has returned to normal ranges, but the proportion of items exceeding 3% is still far above levels before the financial crisis. Goldman Sachs pointed out that this calculation somewhat reflects tariff effects. Warsh acknowledged that wage growth is "moderate," but stated that wages "have not been a reliable indicator of future inflation for a long time" implying that modest wage data does not constitute strong evidence for an improved inflation outlook. Addressing two controversial statements from July. In his speech, Warsh proactively corrected two statements from the July FOMC press conference that had caused market unease. Previously, he had expressed doubts about the future of the 2% inflation target; this time, he explicitly stated: "There should be no misunderstanding the 2% price stability goal set by the Fed, measured by the PCE price index, is a steadfast target." Similarly, after previously appearing ambiguous about policy tools, he confirmed that "short-term interest rates are the primary tool for achieving our dual mandate." JPMorgan noted that these two clarifications together send a clear signal higher inflation will be met with higher federal funds rates. In his speech, Warsh also listed seven principles guiding policy, reaffirmed a focus on monetary aggregates, questioned the role of forward guidance in normal times, and concluded with a call for a "quieter, more purposefully communicative Federal Reserve." JPMorgan remarked that this was the longest speech by a Federal Reserve chair at Jackson Hole since 2018. The economy is "impressive," financial conditions are "not tight." Warsh devoted about a quarter of his speech to discussing economic conditions, adopting a rather conventional tone. JPMorgan stated this portion "sounded like a traditional technocratic Fed chair speech," discussing metrics such as private domestic final purchases. Warshs assessment of the economy was "impressive; the economy seems to have strengthened": real consumer spending is "still healthy despite having faced shocks," and business capital expenditures are "growing rapidly" more than half of capital expenditure growth this year can be attributed to AI-related investments. He cited a growth rate of nearly 3% for private domestic final purchases this year, although Goldman Sachs noted that this figure is currently distorted upwards due to imports of technology related to AI investment. Regarding the labor market, Warsh believed it to be "fairly stable" and "consistent with full employment," with the unemployment rate "still low by historical standards." His overall judgment was that "it is difficult to characterize current broad financial conditions as tight" this statement represents a clear shift from his stance at the June press conference when he attributed the same question to a task force. Goldman Sachs and JPMorgan: A September rate hike is still not the baseline scenario. Warsh revealed in his speech that at the July FOMC meeting, "I and most of my colleagues felt that a wiser approach would be to wait for new information during the inter-meeting period before deciding whether it is necessary to adjust interest rate policy." JPMorgan maintained its forecast for a December rate hike. Feroli acknowledged that, given an increasing number of Federal Reserve officials releasing hawkish signals, taking earlier action "would not be unreasonable," but the key variable is the August employment and CPI data. Goldman Sachs was more definitive in its judgment: a September rate hike is only possible if August CPI and PPI data strengthen beyond expectations. The firm predicts a month-on-month increase in core inflation of about 0.2%, and the FOMC is likely to remain on hold. This article is reprinted from "Wall Street Journal," GMTEight editor: Zhang Jinliang.