Goldman Sachs US: In a Hawkish Jackson Hole Debut, Chair Warsh Says the Fed's 'Principal Focus' Should Now Be on Prices

Goldman Sachs' economics team assesses Chair Warsh's first Jackson Hole speech as distinctly hawkish. He acknowledged that summer PCE and CPI readings came in better than expected but argued they do not signal substantive improvement in the underlying inflation trend. Wage growth remains moderate but has not proven a reliable forward indicator of inflation for a long time. He described the labor market as fairly solid and consistent with full employment, said unemployment remains low by historical standards, and noted it is hard to characterize broad financial conditions as restrictive. He was constructive on the economy overall, impressed by its performance, with healthy real consumer spending despite shocks and rapidly rising business capital expenditure, and estimated that more than half of this year's capex growth may be attributable to AI-related construction. Markets interpreted the speech hawkishly: two-year Treasury yields rose about 7bp, among the largest moves around a Jackson Hole speech in recent years, and the priced probability of a September hike climbed from roughly 30% beforehand to just above 50%. The speech implies a September hike is possible if August CPI and PPI are strong, but Goldman Sachs still expects August core CPI and core PCE at roughly 0.2% month-over-month and an unchanged FOMC.