Leading the climb

At the foot of the Jackson Hole mountains, Kevin Warsh took a wicked pleasure in muddying the waters, toying with Shakespeare’s tongue and the market’s nerves in equal measure.

By dropping the word “Hike” three times in his opening remarks, was the new Fed chair testing the stupidity of lexical algorithms, or did he sincerely want to share his personal experience on the steep trails of the Teton Range? One thing is certain: Warsh can shout from the rooftops that he won’t give any hints about upcoming rate decisions, but his talking points still seem calibrated to invite the market to take him at his word and follow his tracks.

This time, the Fed chair lanced the boil. Faced with the bond market’s impatience, he didn’t brush the inflation problem aside. He put it front and center with a clear message: don’t panic, we’re not sweeping dust under the rug, we’re ready to act.

Now the question is whether these words turn into action. The odds of a September rate hike did climb after the Jackson Hole speech, back up to 60%, but a move is still far from guaranteed. Make no mistake: in Warsh’s mind, answering inflation fears isn’t a promise to hike, it’s a new way of playing for time. After ignoring the problem yesterday, you can talk about it without acting today, before offering an alternative to a rate hike tomorrow.