THE WARSH DILEMMA

THE WARSH DILEMMA Dario Perkins 07 Sep 2026

Kevin Warsh famously doesn’t give forward guidance, although his message at Jackson Hole came pretty close to what we would usually regard as a policy signal. It looked very much like a hint about rate hikes, and with the next meeting just weeks away, markets immediately priced a September hike. Yet, among investors, there is still an intense debate about what the Fed will do, especially after dovish comments from Chris Waller and then a strong payroll report.

1/8 From a fundamental POV the case for rate hikes seems less urgent than a few months ago. Back then, it looked like the Fed was suddenly falling behind the curve. Not only were consumer prices coming in hot (even on underlying measures) but US payrolls were suddenly reaccelerating – a move that caught most pundits (not us…) by surprise. This was embarrassing for a central bank that had missed its inflation target for 5 years, and only recently cut rates in a panicked response to wobbly jobs data.

2/8 Recent data have changed the outlook a little. Although core inflation remains above target YoY, monthly outturns softened over the summer. And the recovery in the labour market looks patchier, not helped by significant volatility from month to month. Despite Friday’s blockbuster report, I would say the US labour market is gradually improving, but employment is not yet breaking higher. Sorta Goldilocks. Job growth is not as “cold” as last year, but not “hot” enough to demand immediate hikes.