OPINION:
Kevin Warsh made a pilgrimage to Jackson Hole, Wyoming, last Friday to mark his 100th day as Federal Reserve chairman.
He opened with a clever joke about hiking trails. It wasn’t until page 15 of a 16-page text that he dropped the bon mot that mattered: “The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.”
Do the math.
America’s elevated inflation clock started in spring 2021 during the first year of the Biden regime and under the Fed leadership of “Too Late” Jerome Powell. It’s the closest to an accusation that Mr. Warsh could make about his predecessor’s incompetence.
Recall that as former President Joseph R. Biden weighed whether to reappoint Mr. Powell, the Fed kept the monetary printing press running at full tilt, accommodating what arguably became the worst fiscal-monetary policy mix since the Burns era of the early 1970s.
As a counterpoint, Mr. Warsh also delivered a strikingly bullish assessment of the Trump economy. Business capital expenditure in equipment and intangibles is growing around 9% over four quarters, the fastest since 2021.
S&P 500 profits are up more than 20% in a year. Credit spreads are near the low end of their historical range. Banks report relatively easy lending standards. Real consumer spending is up more than 2%, while private domestic final purchases are running near 3%.
Mr. Warsh said that he is “impressed by the overall performance of the economy, which appears to have strengthened,” with Main Street and Wall Street “remarkably resilient” in the face of shocks.
Then came the sentence that signaled a possible rate hike: “I would be hard pressed to describe broad financial conditions as restrictive.”
Let’s parse that warning in the context of the broad numbers. Twelve-month inflation as measured by the Fed-preferred gauge: 3.7%. Six-month: 4.1%. That’s going the wrong way.
A Fed chairman who says that financial conditions are not restrictive while the main personal consumption expenditures (PCE) price index runs that high has told you where his bias lies if the data do not cooperate.
Mr. Warsh deliberately refused to tell markets exactly when he might raise rates.
Then came his big rate-hike grenade as he took apart all 199 components of the PCE basket. Fifty-four percent of goods and services posted price increases above 3% over the past year. Over six months, 49% did so at an annualized rate.
In the two decades before the pandemic, the comparable figure was 32%.
That’s one out of every two components still running hot.
Then came the Warsh line that did the actual work: “While this summer’s PCE and CPI [consumer price index] readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”
Translation: While core inflation might be trending down, I don’t believe the good news yet.
That is where the market reaction to Mr. Warsh got interesting. The two-year Treasury note — the maturity most sensitive to Fed policy — jumped from about 4.22% to roughly 4.35% by the close. Futures traders raised the probability of a September rate hike from about 35% to nearly 60%. So the front end of the yield curve clearly heard an inflation hawk.
But the long end was much calmer. The 30-year Treasury, which closed at 5.31% on Aug. 17, its highest close since 2007, barely moved on Friday.
One plausible reading is that investors believe that Mr. Warsh will hike on the short end to bring rates down on the long end. But therein lies the two-pronged danger.
First, Mr. Warsh did not adequately distinguish persistent underlying inflation from an inflation burst driven in significant part by an oil-price shock. Former Chairs Alan Greenspan and Ben Bernanke both understood the central-bank principle at stake: Policymakers must distinguish a temporary energy shock from generalized inflation before tightening into it.
Mr. Warsh and his merry band of Fed hawks would do well to remember why.
Second, while Mr. Warsh calls the labor market stable and consistent with full employment, the economy did shed 23,000 payroll jobs in July. That unexpected drop certainly belongs in the same discussion as the inflation prints given the Fed’s dual mandate.
Of course, Mr. Warsh argues, with some good reason, that weak monthly job gains partly reflect weak labor-supply growth. Dallas Fed research finds that the reversal in illegal immigration, combined with declining labor-force participation, has indeed pushed the break-even pace of job creation dramatically lower.
Still, a Warsh Fed that appears poised to tighten into a rolling employment stall because it mistakes an energy shock for generalized inflation risks a policy failure every bit as harmful as the serial mistakes foisted on America by Mr. Powell in his eight years as Fed chair.
• Peter Navarro is the senior counselor for trade and manufacturing. www.peternavarro.com
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