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MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It- Evans
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Federal Reserve Chairman Kevin Warsh’s hawkish rhetoric on inflation might need to be backed up with concrete action in the form of interest rate increases soon in order to preserve the FOMC’s price stability credentials, former Chicago Fed President Charles Evans told MNI Friday.
“The balance of risks for Warsh almost has to be that he should take action to show that he's very serious about bringing inflation down,” Evans said in an interview.
There is a good case to be made for a “watchful waiting” strategy, namely that much of the above-target inflation is being driven by supply related factors that could soon fade even without restrictive monetary policy, Evans said.
But he added that Warsh’s sharp critique of the Fed for allowing excess inflation to persist for over five years means “you could have imagined him acting with more pace since he promised regime change.”
Evans welcomed the chair’s inaugural Jackson Hole remarks as offering greater detail into his view on the economy and inflation than he had previously.
“He hadn’t talked enough in my opinion about why he was not providing more of an economic outlook,” he said. (See MNI: Warsh Speech Non-Committal On Action - Ex-Officials)
ACT NOW
The other problem with waiting too long before tightening policy is allowing higher inflation and inflation expectations to become entrenched in a way that requires even more aggressive action later.
“The risk that he would be running is that you lose track of this. Inflation takes hold, and now it's even harder to bring down,” Evans said. “You take some action now so you don’t find yourself behind the eight ball later and having to do more.”
PCE inflation, which Warsh reinforced is the Fed’s target measure, rose 3.7% in July, while core prices climbed 3.3%.
RATE PATH UNCLEAR
Still, Warsh’s hawkish comments on inflation were sufficiently conditional that rate hikes are not yet a sure thing, added Evans. He said the chairman seems to be hoping for now that a forceful verbal commitment to returning to 2% might be enough.
“People are still struggling on how he’s going to come down on this,” said Evans. “I can't say I know how it will play out. That's what he wants. He wants everybody to sort of figure it out yourselves, see about the data. I’m not quite sure I find that particularly helpful.”
Aug-28 17:12
Federal Reserve Chairman Kevin Warsh took a step toward clarifying his views on the economic outlook in his Jackson Hole speech but his reluctance to offer concrete hints about future policy action still leaves open doubts about the central bank’s resolve to contain above-target inflation, former Fed officials told MNI.
Warsh’s remarks Friday were hawkish enough to dispel some of the fears about his credibility as an inflation fighter raised during a July press conference that led to an adverse bond market reaction, the officials said.
However, his circumspection regarding the policy path and even the current stance of policy have left the markets guessing. Futures markets now price a 50-50 chance of a rate hike at the Fed’s September meeting.
"The speech was hawkish – PCE is elevated and not quickly moving to target. The market views it as hawkish. But it’s still unclear if actions will reflect rhetoric,” said former Boston Fed President Eric Rosengren. "That is why markets have not reacted more. A failure to raise in September unless facts change materially will be difficult to explain."
WIGGLE ROOM
Ex-Chicago Fed President Charles Evans agrees that the proof of the pudding will be in the eating.
“Nothing here was really path-breaking. He clearly gets credit for walking through today's situation. Of course, that should have been in his previous opening presser remarks,” Evans said.
“The meat of his commentary continues to be his reliance on Fed trust: ‘We have work to do’ is the only conditionally actionable statement," he added. "There is a lot of wiggle room to continue with watchful waiting for some time. Or he may decide that the risks of sticky inflation are just too great to ignore."
The key line from Warsh's speech -- "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." -- was the closest the Fed chairman came to offering a hint of policy direction. He also downplayed benign interpretations of inflation such as the idea that wage growth and inflation expectations are contained.
50-50
The shift in approach from Warsh means a lot more volatility in terms of rate expectations. Markets rarely went into a meeting under ex-chair Jerome Powell without near absolute certainty as to what the Fed would do.
“I would give a slightly higher probability to a September hike than before the speech. Fifty-fifty is probably a good call given what we have in hand now. There is more data info to come, and it’s a committee process. Warsh couldn’t really hint at it even if he wanted to, which he certainly did not on principle,” said Dennis Lockhart, former president of the Atlanta Fed.
“It was a high level, big picture speech as advertised. More clarity around his personal approach and assessment of the state of the economy. Long on framework while short on concrete prescription -- no surprise. Hawkish, on balance. He presented a sober picture of the Fed’s inflation challenge.”
Aug-28 17:05Federal Reserve Chairman Kevin Warsh took a step toward clarifying his views on the economic outlook in his Jackson Hole speech but his reluctance to offer concrete hints about future policy action still leaves open doubts about the central bank’s resolve to contain above-target inflation, former Fed officials told MNI.
Warsh’s remarks Friday were hawkish enough to dispel some of the fears about his credibility as an inflation fighter raised during a July press conference that led to an adverse bond market reaction, the officials said.
However, his circumspection regarding the policy path and even the current stance of policy have left the markets guessing. Futures markets now price a 50-50 chance of a rate hike at the Fed’s September meeting.
"The speech was hawkish – PCE is elevated and not quickly moving to target. The market views it as hawkish. But it’s still unclear if actions will reflect rhetoric,” said former Boston Fed President Eric Rosengren. "That is why markets have not reacted more. A failure to raise in September unless facts change materially will be difficult to explain."
WIGGLE ROOM
Ex-Chicago Fed President Charles Evans agrees that the proof of the pudding will be in the eating.
“Nothing here was really path-breaking. He clearly gets credit for walking through today's situation. Of course, that should have been in his previous opening presser remarks,” Evans said.
“The meat of his commentary continues to be his reliance on Fed trust: ‘We have work to do’ is the only conditionally actionable statement," he added. "There is a lot of wiggle room to continue with watchful waiting for some time. Or he may decide that the risks of sticky inflation are just too great to ignore."
The key line from Warsh's speech -- "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." -- was the closest the Fed chairman came to offering a hint of policy direction. He also downplayed benign interpretations of inflation such as the idea that wage growth and inflation expectations are contained.
50-50
The shift in approach from Warsh means a lot more volatility in terms of rate expectations. Markets rarely went into a meeting under ex-chair Jerome Powell without near absolute certainty as to what the Fed would do.
“I would give a slightly higher probability to a September hike than before the speech. Fifty-fifty is probably a good call given what we have in hand now. There is more data info to come, and it’s a committee process. Warsh couldn’t really hint at it even if he wanted to, which he certainly did not on principle,” said Dennis Lockhart, former president of the Atlanta Fed.
“It was a high level, big picture speech as advertised. More clarity around his personal approach and assessment of the state of the economy. Long on framework while short on concrete prescription -- no surprise. Hawkish, on balance. He presented a sober picture of the Fed’s inflation challenge.”
Aug-28 16:17
European gas prices could spike as high as EUR85-90/MWh in the event of an early winter, given persistent disruption in the Strait of Hormuz but the risk of gas shortages remains very low, a European Commission official told MNI.
Despite low gas reserve levels, Europe need not fear outright shortages or supply disruptions, given its purchasing power relative to competing buyers, the source said. However, an early cold snap in northern Europe as soon as October would make it very difficult to meet the 80% reserves target ahead of winter.
"What generates uncertainty is not fundamentals but how fundamentals would be read by the market," the source said, adding that despite lower reserves Europe now consumes 15% less gas than before Russia's invasion of Ukraine, though investors could grow nervous in the event of an early winter — a scenario that has become less common in recent years.
A eurozone national central bank official told MNI that higher gas prices on top of persistently high oil could weigh on inflation expectations.
"There are many countries where gas plays an important role in the energy mix and a spike would have a considerable impact in energy prices,” the official said. (See MNI SOURCES: ECB Closes In On Sep Rate Hike But Unclear Beyond)
Spot TTF natural gas opened on Friday at EUR69.
SLOW RECOVERY
Even in the case of a swift resolution to the conflict in the Persian Gulf, gas prices will take time to return to pre-February 2026 levels, given the expected slow recovery in LNG traffic, damage to Qatari infrastructure and investment delays in other producing regions, including the United States, that would otherwise boost output in the near term, the Commission source added.
Oil is now less of a worry, the source said.
"It is confirmed that oil output is being successfully transported out thanks to smaller vessels and new ways that is holding prices better than what people expected, but with gas we don't have this flexibility and prices could rise further,” the Commission official said.
Aug-28 13:50
Bank of Canada Governor Tiff Macklem's case for continuing this year's interest-rate rate hold is set to strengthen in Wednesday's announcement as the return to a full trade war amplifies competing growth and inflation risks over earlier concerns about the effects of higher energy prices.
The overnight benchmark will remain at 2.25% or the low end of the Bank's neutral range, according to all 23 economists surveyed by MNI. Prime Minister Mark Carney says he will will impose counter tariffs on USD20 billion of goods on Sept 8 and economists estimate the trade fight will dent growth by a few tenths of a percent while inflation will quicken by a similar magnitude.
U.S. tariffs create a narrow but intense hit on autos, steel and aluminum makers which Bank officials say monetary policy isn't well-equipped to tackle. Renewed focus on trade tensions could mean Macklem drops earlier musings about the potential for multiple rate hikes to keep high oil prices brought on by the Iran conflict from creating sticky inflation.
There is no risk-free move given the speed of monetary policy compared with shifting geopolitical and market developments, Macklem has said. Core inflation is also near the Bank's 2% target for total inflation and the Bank in July said the headline gauge could slow to target early next year from recent levels around 3%. (See MNI: BOC Hold Extended Until Tariff Damage Clear -Ex Officials)
Donald Trump's escalating tariff threats could weaken growth in coming months, but markets have been stable as investors note his new Jan 1 deadline gives ample time for talks to restart and he continues to avoid levies on major imports like energy and potash. Carney similarly has avoided extreme moves such as export taxes ahead of U.S. midterm elections.
Canada's economy has also shown resilience against the first wave of tariffs last spring, and GDP growth rebounded to a 3.3% annualized pace in a report Friday, with a first-quarter contraction revised into a modest gain. Investors and economists continue to expect the Bank may hike rates early next year as spare capacity is used up.
As for the release of the decision, as of Friday morning unionized security guards are picketing the Bank's headquarters because of a labor dispute. That may lead to a repeat of the last decision, where reporters didn't get an advance copy and it was released on the web.
Aug-28 13:48
The Chicago Business Barometer™, produced with MNI, dropped 10.5 points to 47.1 in August. The Barometer is below the neutral 50 level for the first time since April, and at its lowest since December.
The fall was driven by declines in New Orders, Order Backlogs, Production and Supplier Deliveries. A small rise in Employment provided some positive offset.
NEW ORDERS SLIDE INTO CONTRACTION
New Orders contracted sharply, slipping 15.4 points, but still above April’s low. The share of respondents reporting increased orders declined sharply.
Order Backlogs softened 12.1 points, remaining below the neutral mark and now at its lowest since last November.
Production declined 8.8 points for its first contractionary reading since last December, and the lowest level since last November. Some respondents noted slowdown in customer demand.
SUPPLIER DELIVERIES EASE BUT STILL EXPANSIONARY
Supplier Deliveries eased 2.6 points, but remained in expansion for the nineteenth consecutive month. The proportion of respondents reporting faster deliveries declined slightly, as did the share reporting slower deliveries.
Employment provided a positive offset, rising 4.3 points to its first expansionary reading in five months, although only marginally so.
Inventories retreated 14.0 points, returning to contraction after one month above 50. The share of respondents reporting larger inventories fell sharply.
PRICES PAID PICK UP TO HIGHEST SINCE FEB 2022
Prices Paid grew 3.8 points to the highest level since February 2022. Some respondents cited higher metal costs in August.
The survey ran from August 1 to August 12.
Aug-28 13:45
Norges Bank and the Riksbank have made the case for boosting the interbank market and weaning banks away from dependence on reserves as they shrink but the Swedish central bank’s very narrow rate corridor poses challenges, Bank Policy Institute Chief Economist Bill Nelson told MNI.
While both banks consider that reducing banks' reliance on reserves is key to reviving interbank markets, the Riksbank's exceptionally narrow corridor of plus/minus 10 basis points around the policy rate “doesn't leave a lot of incentive to participate in an interbank market. So there is some tension between their stated objective and their currently articulated [approach]," Nelson said.
The Riksbank has already acknowledged that the narrow corridor could be an issue, with Governor Erik Thedeen telling MNI in March that "we have not ruled out the corridor widening." (See MNI INTERVIEW: No Hike Delay If Shock Lasts-Riksbank's Thedeen)
But change can be hard. Keeping the corridor narrow can avoid volatility while widening would only see benefits down the line. Institutional inertia is another factor.
The world’s most important central bank, the Federal Reserve, kept its discount rate below market rate for decades and never found the right time to raise it, according to Nelson.
While the central banks of both Norway and Sweden are both reducing their footprints, and Norges Bank’s issuance of central bank certificates programme has driven spreads wider, the impact on money market volumes is not yet clear.
"You need to have sufficient daylight between the interbank rate and the rate that the central bank pays on reserve balances to get banks to lend to each other, to give banks an incentive to say, 'well, I don't want to just leave this money sitting on account'," Nelson said.
But change can be hard. Keeping the corridor narrow can avoid volatility while widening would only see benefits down the line. Institutional inertia is another factor. The world’s most important central bank, the Federal Reserve, kept its discount rate below market rate for decades and never found the right time to raise it, according to Nelson.
A new Bank for International Settlements working paper points to recent evidence that banks have increasingly relied on their central bank accounts rather than using money markets to manage imbalances, and that these effects may be self-reinforcing during prolonged periods of quantitative tightening, atrophying interbank markets.
LIQUIDITY REQUIREMENTS
While mandatory liquidity requirements, particularly the Basel III Liquidity Coverage Ratio, seem to have boosted the need for central bank deposits, the BIS paper notes that the LCR can be met by other high-quality liquid assets.
"A big part ... of shrinking the balance sheet is reforming liquidity requirements, so that they recognise the capacity to get funding on the liability side of your balance sheet," Nelson said.
Nelson’s work has repeatedly highlighted how demand for reserve balances has ratcheted up over the years. Fed staff estimates, for example, show demand soaring from USD30 billion to USD3 trillion. The BOE’s preferred minimum range of reserves measure is estimated to be as high as GBP540 billion.
Still, the view that there is a negative correlation between the scale of central bank reserve and money market activity, reflected in former BIS head Claudio Borio's often stated view that higher levels of reserve supply could weaken market functioning, has had some pushback, particularly at the Bank of England, which is adopting a demand driven system of reserves. Officials at the BOE, which operates with no difference between its lending and deposit rates, have argued that sterling markets data do not support this idea.
"Secured money market activity, both between banks and between banks and non-banks does not seem to have been affected by the injection of abundant reserves," BOE Executive Director Markets Vicky Saporta said in a speech last year, although she acknowledged the demise of unsecured interbank liquidity.
Aug-28 13:05
The Reserve Bank of New Zealand Monetary Policy Committee is likely to raise the official cash rate 25 basis points to 2.75% on Wednesday as it continues to normalise policy and move the OCR towards neutral.
A hike would be the second consecutive increase following July’s move, the first in more than three years. Markets assign a 93.5% probability to a hike and expect the MPC to continue to move rapidly, taking the OCR to around 3.5% by mid-2027, toward the upper end of estimates of neutral.
Governor Anna Breman said in July that improved financial conditions had prompted the unanimous decision to raise the OCR despite softer Q1 inflation. (See MNI RBNZ WATCH: Financial Conditions Prompt OCR Hike To 2.5%) With headline inflation still above the target band and the OCR relatively low, the MPC is likely to continue removing monetary stimulus and signal further hikes.
FRESH DATA
Headline inflation was 4.1% y/y in the June quarter, slightly below the 4.2% forecast in the May Monetary Policy Statement, but above the RBNZ’s updated 3.9% forecast at the July OCR review. Core inflation measures remained within the RBNZ’s target band in Q2, while there was little evidence of widespread spillover from higher oil prices into other areas. Non-tradables inflation eased to 3.4%, in line with expectations.
Inflation expectations also eased, with surveys of households and businesses declining. In most cases, expectations returned to levels seen before the oil price spike.
Labour market data has largely pointed to continued weakness. The unemployment rate rose to 5.6% in the June quarter, above the RBNZ’s 5.4% forecast. Employment growth was firmer than expected, though some of the strength likely reflected survey volatility. Wage growth was also slightly firmer than expected but remained contained, with the Labour Cost Index rising 0.7% q/q and 2.0% y/y.
Overall, these data are unlikely to have shifted the RBNZ’s assessment materially. Updated estimates of net migration and population growth over the past year have also been lower than expected.
UPDATED FORECASTS
The RBNZ’s updated MPS forecasts are likely to signal the Bank’s intention to return the OCR to 3% by year-end, implying at least one further hike this year, with additional hikes into 2027.
Former RBNZ staff have told MNI that Breman’s decision not to begin the hiking cycle in May was a mistake and that the MPC will want to move the OCR to 3% by year-end. (See MNI INTERVIEW: RBNZ Needs 3% OCR ASAP - Ex Dep Gov)
While the Bank is unlikely to signal a higher OCR than the 3.3% peak shown in its May forecasts, some economists see a need for the OCR to reach 4% by mid-2027 as underlying price pressures increase the neutral rate.
Aug-28 07:10
The Federal Reserve should seriously consider raising interest rates at its September meeting or later this year because inflation remains uncomfortably high, but the decision to hike is not clear cut given how much price pressures are being driven by supply shocks, former Dallas Fed President Robert Kaplan told MNI.
“I actually think this is a difficult decision to make and I would be very open-minded going into September to taking some action, raising rates,” said Kaplan, now vice chairman of Goldman Sachs, in a telephone interview. “But it’s not a no-brainer. I have arguments on both sides.”
One obvious motivation for rate hikes is an inflation rate that has been above target for over five years and has shown very little improvement over the past year – and a policy rate level that Kaplan does not think is particularly restrictive.
“The oil spike and the war has clouded all this where you're getting readings now solidly in the threes, and if that's the case, it's clear then the Fed is somewhere between 25 and 75 (basis points) too low,” he said.
SUPPLY DRIVEN
Much of what has been keeping inflation above target is a series of supply shocks, including tariffs, constraints on labor force growth due to immigration reform, and the spike in oil prices related to the Iran war, said Kaplan.
“At the same time we have a boom in AI infrastructure spending which strains all those supply constraints. Raising the fed funds rate may be necessary but it’s not a uniquely well suited tool to deal with a supply shock,” he said.
In addition, Kaplan said business activity outside AI related sectors is sluggish, and there is little sign of overheating in the labor market or consumer spending. Those factors argue for a wait-and-see approach that allows the Fed to hold rates where they are.
“Inflation has been above target and sticky but the reasons have been, in my opinion, supply related,” he said.
LESS NOISE
Against that backdrop, Kaplan is sympathetic to Warsh’s desire to provide less forward guidance and that his colleagues approach each meeting with an open mind, rather than coming in with hardened preconceptions about the direction of policy.
Still, the former policymaker is hopeful that the chairman can find a way to more effectively explain the thinking behind the latest policy decision to hold rates steady last month. (See: MNI: Warsh Needs To Restore Confidence, Former Officials Say)
“I would suggest that he use this as an opportunity to insert four or five sentences to explain the rationale for the move in July,” said Kaplan. “The committee voted to keep rates as they are in July. Here’s why, here is the nature of the discussion.”
Beyond that, Kaplan thinks Warsh is wise to not pre-commit to future actions that look highly uncertain and could box in the FOMC. “I agree with him about being more careful about forward guidance.”
Aug-27 17:33
Labor markets all over the world are on the cusp of being affected by AI, but impacts in America are limited so far, former Bureau of Labor Statistics commissioner Erika McEntarfer told MNI, warning that policymakers need to be ready for a variety of economic outcomes.
"So far there's very few signs that AI is replacing workers at scale," she said. That runs opposed to predictions for years now from AI leaders that a wipeout in white collar jobs is eminent.
On the current outlook, McEntarfer expects Friday's preliminary payroll benchmark to be positive - though not particularly large - for the first time since 2022. She said low rates of churn and hiring suggest a labor market that has more slack than the low unemployment rate would otherwise suggest. That is hitting young workers particularly hard, she added.
McEntarfer stressed that early evidence is hardly the last word on the future of work in an AI world and recommended that policymakers prepare for a variety of outcomes. (See: MNI INTERVIEW: AI Exacerbates Job, GDP Volatility - Fed's Sly)
"It is very important to not over-torque on any one forecast of what you think the impacts will be, and instead to have policy options that will dial up if certain impacts take place," she said, noting the failures of unemployment insurance during Covid.
LABOR STABILITY
McEntarfer served as Bureau of Labor Statistics commissioner from 2024 until August 2025, when she was fired by President Donald Trump after a weak jobs report, a dismissal widely seen as politicization of national statistics. Before the BLS, she spent time at the White House Council of Economic Advisers, the Treasury and the Census Bureau. She is now a fellow at Stanford’s Institute for Economic Policy Research.
There is little evidence of AI depressing employment or job postings in the most highly-exposed occupations, she said, even if it could be creating pockets of disruption that aren’t easily visible in aggregate data.
"Even when you drill down into occupations that are more exposed to disruption from AI, what you largely see is employment and unemployment trends that are very stable," she said. "There's actually been a surge in job postings for software developers in the last few months. Probably not what anyone was expecting to see, given all of the fears about AI replacing software developers."
Firms spending the most on AI are actually adding more workers than those spending less, McEntarfer said. "We're not seeing the big spenders automating a lot of work. We're instead seeing them investing."
AI could be one reason for the slowdown in hiring of young workers, but a mix of potential culprits also includes increased remote work, she said.
PRODUCTIVITY
AI’s impact on worker productivity is mixed but generally positive, while firm adoption has accelerated unevenly across the economy.
"On the micro side, there is actually a fair amount of evidence that AI does improve productivity in certain tasks among certain individuals," she said, pointing to evidence concerning customer service agents, coders, and writing. "The disconnect is whether any of this is translating into increased productivity in the economy writ large."
The rise in productivity in the last few years started before the launch of ChatGPT and probably represents post-pandemic restructuring of jobs, capital, and processes, she said.
BLS DATA
McEntarfer has confidence in the continued reliability of BLS data, despite resource constraints. Staffing is down about 20% compared to the start of 2025, mostly due to DOGE and voluntary resignations, she said.
"They are starting to hire again at BLS, but 20% of the workforce is a lot to replace, so that will take a while. It does impact the amount of data that can be collected," McEnarfer said. (See: MNI INTERVIEW: Mounting BLS Pressure Harmful For Data- Groshen)
"I can vouch for the accuracy and lack of interference in the data up until the moment that I was fired. Since my firing, the senior career servants at BLS who are running the agency, have been very clear that if there is interference, they will there will be mass resignations and there will be whistles blown to the press," she said.
Aug-27 16:52About
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