Warsh offered forward guidance after all, former Fed vice chair says

Markets knew they weren't going to get an answer to what the Federal Reserve would do next — so-called forward guidance — when the central bank's chairman, Kevin Warsh, spoke on Friday morning. The biggest question looming over Warsh's highly anticipated speech was whether he would clarify how the Fed will respond to rising inflation.

On that, he delivered, former Fed vice chairman Alan Blinder, now a professor of economics at Princeton University, said in an interview with Yahoo Finance.

Warsh painted a robust picture of the US economy, noting that economic growth appears to have strengthened, while characterizing the labor market as stable at full employment. He underscored that inflation remains too high and that while this summer's inflation readings were better than expected, they "do not tell me that underlying trends have meaningfully improved."

"I would call that forward guidance," Blinder said. "He doesn't call it forward guidance … That sounded to me like somebody who thought interest rates should go up, right?"

Blinder thinks a September rate hike is on the table, saying Warsh sounded "like a man who was rationalizing raising interest rates."

"My guess is they'll be raising rates in September, just a quarter of a point, and [then] they'll wait," he said.

Traders appear to agree. Odds of a September rate hike rose to nearly 60% following Warsh's speech, up from 35% on Thursday.

"Markets almost always want more clarity than policymakers can deliver," Blinder added. "There's a classic mismatch between the concreteness, I'll call it, that the markets are constantly craving. I think it's the case that Kevin Warsh wants to be a little less open than, say, [former Fed Chair] Jay Powell."

In his speech, Warsh laid out the data he's monitoring to set policy and reaffirmed that the Personal Consumption Expenditures index (PCE) is the Fed's preferred yardstick for inflation, after suggesting it may not be in July.

He said he is watching changes in the growth rates of corporate earnings and capital spending, as well as the follow-on effects on asset prices, business confidence, consumer incomes, and spending.

Esther George, former president of the Kansas City Federal Reserve, said she thought Warsh delivered a very good speech.

"Although he stopped short of saying 'and here's what we'll do about it,'" she said of his economic assessment, "I think it sets it up in a way that is true to what he set out to do, which is 'I'm not going to over promise, but I'm going to tell you what we're concerned about.'"