Warsh and Upcoming US Economic Data

The stock market may stay range bound this week, as key US economic data are not expected to change the overall macro picture.  The data are expected to be consistent with the broad outline of the economy described by Fed Chair Warsh at the Jackson Hole Conference last week -- solid labor market and strong manufacturing sector.  Upcoming inflation data could be more important for the Fed.

The Fed's main focus is bringing inflation down to its 2% target, according to Warsh.  He said the Fed will "have work to do" if it does not have confidence that underlying inflation is clearly moving in the right direction and with sufficient speed.  This comment does not guarantee a September rate hike, but suggests upcoming inflation data could trigger one.  The August inflation data will be released September 11 (CPI) and September 30 (PCE Deflator).   The FOMC Meeeting will be on September 16-17.

While Warsh reaffirmed the PCE Deflator as the main measure of inflation for the Fed, he emphasized that the Fed's focus is on the underlying inflation trend -- defined as the "generalized change in prices in the economy, unaffected by idiosyncratic factors."  He mentioned, perhaps for the first time by a Fed official, that more than 50% of the components of the PCE Deflator show increases above 3% over the past 12 months.  The market (and Fed) will likely focus on dis-aggregating upcoming inflation data this way to help judge whether the underlying trend is moving down.  

As for this week's economic data, Warsh reiterated the Fed's view that the labor market is "quite stable and consistent with full employment."  Consensus expects the August Employment Report to fit that description.   Nonfarm Payrolls are seen bouncing back to +45k m/m from -23k in July.  The risk may be for a larger increase, since the July decline reflected a drop in State & Local Government Education jobs that might have resulted from faulty seasonal adjustment.  More importantly, Private Payrolls are seen speeding up to +50k from +30k -- exceeding the prior +40k 3-month average.  (The Claims data suggest little change in the pace of Private Payrolls.)   

Consensus also expects the Unemployment Rate to edge back up to 4.2% from 4.1%, but this would keep it within its low range -- not changing the Fed view that the labor market is at full employment.  And, Average Hourly Earnings is seen speeding up a bit, but to a still below-trend 0.2% m/m from 0.1% in July.  Warsh acknowledged that wage inflation has been "moderate."  But, he did not take much comfort from this, saying that wages have not tended to be a good predictor of future inflation.  

Consensus looks for the August Mfg ISM to edge down to 55.3 from 55.6.  It would remain above the 46.3-53.0 range seen since early 2022.  Such a high level would be consistent with Warsh's view of the manufacturing sector.  He highlighted the strength of capital spending, much of which is tied to the AI build-out.  

Overall, Warsh's speech was essentially one more instance where he identified a problem -- too high inflation -- but did not decisively indicate a near-term rate hike.  Possibly, he does not yet have consensus among FOMC members to tighten policy.  His reference to the somewhat inflationary tilt in the distribution of price increases among PCE Deflator components as well as his sense that financial markets are not restrictive may suggest he is looking for more evidence to convince his colleagues.  Tracking Fed official speeches in coming weeks may offer clues if an absence of consensus in the Committee is the case or is ending.  Hawkish speeches should be expected by the three Committee members who dissented in favor of a hike at the July Meeting -- Cleveland Fed President Hammack (hawk), Minneapolis Fed President Kashkari, and Dalls Fed President Logan,   Fed Governor Waller (fence sitter) speaks on Thursday.  So does President Hammack.

Here is a breakdown of the FOMC Members in terms of hawk, dove and fence sitters, according to AI:

         Hawk                                Dove                Fence Sitter     

    Hammack                            Paulson              Barr           

    Kashkari                                                         Waller               

    Logan                                                              Bowman (slight dove)                                                     

    Warsh                                                             Jefferson       

    Cook (leans)                                                   Williams (slight dove)          

                                                                            Powell 

Fence Sitters would need to be convinced to tighten for there to be a rate hike.