Warsh's First Jackson Hole Speech as Chairman Was Hawkish, but Goldman Sachs Still Expects the September FOMC to Hold Steady

Overview

The report interprets Federal Reserve Chairman Kevin Warsh's first Jackson Hole speech, focusing on his views regarding inflation, economic activity, the labor market, and the policy choice in September. Goldman Sachs characterizes the speech as hawkish but believes a rate hike depends on whether August inflation data exceed expectations; its baseline scenario remains for rates to be left unchanged in September.

Core views

First, Warsh placed price stability at the center of the current policy discussion. He noted that inflation remains above the 2% target, so the Fed's “predominant focus” right now should be on prices, and described the current inflation data as “concerning.” He emphasized that policymakers must be confident that underlying inflation is returning to target at a clear and sufficiently rapid pace; otherwise, the Fed will still need to act. He also reiterated that the 2% target measured by the PCE index is a firm and fixed objective. Although summer PCE and CPI readings were better than expected, he does not believe they are sufficient to demonstrate that the underlying trend has materially improved. Second, Warsh's interpretation of wages and inflation breadth was likewise hawkish. He acknowledged that wage growth was moderate but argued that wages have not been a reliable indicator of future inflation for a long time, so price pressures cannot be ruled out solely based on wage data. Over the past 12 months, goods and services with price increases exceeding 3% accounted for 54% of the PCE basket. This share is significantly below the post-pandemic peak of approximately 77%, but remains well above the 32% average over the two decades before the pandemic. Goldman Sachs added that the elevated level of this breadth indicator partly reflects the impact of tariffs. The implication is that although inflation pressures have narrowed from their peak, they have not yet returned to the normal pre-pandemic range. Third, economic activity and the labor market did not provide Warsh with a clear reason to cut rates. He believes the overall performance of the U.S. economy has been impressive and appears to have strengthened, with real consumer spending remaining healthy despite shocks and business capital expenditure growing rapidly. More than half of this year's incremental capital expenditure may have come from AI-related construction. Private domestic final purchases have grown at close to 3% so far this year; Warsh believes this measure usually contains more useful signals than GDP. However, Goldman Sachs cautions that imports of technology products associated with AI investment may currently be distorting this measure upward, meaning that the near-3% growth rate cannot be viewed entirely as a reflection of pure domestic demand strength. Fourth, Warsh described the labor market as “quite stable” and consistent with full employment, with the unemployment rate still low by historical standards. He also said it is difficult to characterize broad financial conditions as restrictive. Combined with resilient demand, stable employment, and financial conditions that are not clearly tight, the speech suggests that the Fed has room to continue prioritizing inflation without urgently pivoting toward easing because of economic weakness. Fifth, the policy path still depends on forthcoming data. Warsh said that at the July FOMC meeting, he and most of his colleagues believed the wiser course was to wait for new information during the intermeeting period before deciding whether to adjust rates. Based on this, Goldman Sachs concludes that a September rate hike is possible if August CPI and PPI are stronger than expected. However, it still forecasts that both August core CPI and core PCE will rise approximately 0.2% month over month, supporting its baseline view that the September FOMC will leave rates unchanged. Finally, the market quickly interpreted the speech as a hawkish signal. Following its release, the U.S. 2-year Treasury yield rose by approximately 7 basis points, one of the larger moves around a Jackson Hole speech in recent years. The market-implied probability of a September rate hike also rose from approximately 30% before the speech to slightly above 50%. This indicates that the speech materially changed near-term policy expectations, although Goldman Sachs' inflation forecast and expectation that the Fed will hold steady remain more dovish than the market's repriced outcome.

Analysis framework

Goldman Sachs first extracts Warsh's key language regarding the 2% inflation target and underlying inflation trends, then uses the breadth of price increases within the PCE basket and comparisons with historical ranges to assess whether inflation pressures have truly normalized. It subsequently examines consumption, capital expenditure, private domestic final purchases, and the labor market to evaluate whether the economy is strong enough to withstand tighter policy. Finally, the report applies its August inflation forecasts to conditional scenarios for the September FOMC and uses changes in the 2-year Treasury yield and the market-implied probability of a rate hike before and after the speech to assess the market's interpretation of the remarks.

Methodology notes

• Macroeconomic framework

  Comparison of Inflation Breadth with Historical Benchmarks

  The report examines the share of items in the PCE basket rising by more than 3% and compares the current 54% both with the post-pandemic peak of approximately 77% and the 32% average over the two decades before the pandemic to determine whether price pressures have returned to normal from a broadly diffused state.

• Event Strategy and Behavioral FinanceEvent-driven analysis

  Market Repricing Around the Jackson Hole Speech

  The report compares changes in the U.S. 2-year Treasury yield and the probability of a September rate hike before and after the speech to measure how hawkish the market perceived the remarks to be and their impact on near-term policy expectations.

• Macroeconomic framework

  Data-Dependent Conditional Scenario Analysis

  The report treats stronger-than-expected August CPI and PPI as the condition for a possible September rate hike, while using its own forecast of approximately 0.2% month-over-month increases in core CPI and core PCE to support the baseline scenario of leaving rates unchanged.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. 2-Year Treasury

  Warsh's hawkish speech pushed the yield up by approximately 7 basis points, reflecting increased market pricing of a September rate hike.

  Weaknesses

  Relatively sensitive to recent inflation data and changes in Federal Reserve policy expectations.

  Comparison

  The approximately 7-basis-point move was one of the larger market reactions around a Jackson Hole speech in recent years.

  Risks

  If August CPI and PPI are stronger than expected, the possibility of a September rate hike will rise further.

Key data

• Fed PCE Inflation Target2%Warsh described it as a firm and fixed price stability objective
• Share of PCE Basket Items Rising by More Than 3%54%Measured over the past 12 months
• Post-Pandemic Peak in Inflation Breadthapproximately 77%Compared with the current 54%
• Pre-Pandemic Benchmark for Inflation Breadth32%The level over the two decades before the pandemic
• Growth in Private Domestic Final Purchasesclose to 3%Growth rate so far this calendar year, although Goldman Sachs cautions that imports of AI technology products may be causing an upward distortion
• AI Contribution to Capital Expenditure Growthmore than halfThe portion of this year's capital expenditure growth that Warsh estimates may be attributable to AI-related construction
• August Core CPI Forecastapproximately 0.2% month over monthGoldman Sachs forecast
• August Core PCE Forecastapproximately 0.2% month over monthGoldman Sachs forecast
• U.S. 2-Year Treasury Yield Reactionup approximately 7 basis pointsThe move following the speech's release, one of the larger fluctuations around a Jackson Hole speech in recent years
• Probability of a September Rate Hikeslightly above 50%Market pricing, compared with approximately 30% before the speech

Impact & implications

The report believes Warsh's comments on the inflation target, the breadth of price increases, and financial conditions have clearly raised the realistic possibility of a September rate hike, pushing up short-term Treasury yields and the market-implied probability of a rate increase. However, Goldman Sachs expects August core inflation to rise approximately 0.2% month over month and therefore still believes the FOMC will wait for more information and leave rates unchanged in September. Resilient economic activity and employment mean that policy discussions can continue to prioritize bringing inflation down, while the support that AI investment provides to capital expenditure and domestic demand indicators must be assessed alongside distortions from imports.

Risks

• If August CPI and PPI are stronger than expected, the Federal Reserve may raise rates in September rather than leave them unchanged as Goldman Sachs expects in its baseline scenario.

What to watch

• Watch whether August CPI and PPI are stronger than expected.
• Watch whether August core CPI and core PCE achieve Goldman Sachs' forecast of approximately 0.2% month over month.
• Watch whether the September FOMC ultimately chooses to raise rates or leave them unchanged.
• Watch whether the market-implied probability of a September rate hike and the U.S. 2-year Treasury yield continue to adjust.