Fedspeak's Back, And Warsh Is A Breath of Fresh Air

Federal Reserve Chair Kevin Warsh's recent speech signals a potential shift back towards monetary policy fundamentals, though inconsistencies remain. He emphasized "money matters" and critiqued forward guidance as a "hall of mirrors," suggesting a move away from rate-centric policy.

This focus on money supply, particularly the pandemic-era M2 surge, offers a compelling explanation for current inflation compared to solely blaming interest rates. However, Warsh also stated short-term interest rates are the "predominant tool," creating a tension that raises questions about the Fed's future direction.

We expect the Fed will remain hawkish, with markets likely pricing in a higher chance of a September rate hike. The key will be observing whether the Fed genuinely prioritizes money supply and balance sheet actions over solely managing the federal funds rate.