Warsh remarks sharpen focus on PCE inflation gauge
Federal Reserve Chair Kevin Warsh's hawkish debut at the Jackson Hole symposium on Friday is prompting some investors to take a closer look at the U.S. central bank's preferred inflation gauge as they assess whether policymakers are more likely to raise interest rates or leave them unchanged.
Phil Blancato, chief market strategist at Osaic, said his firm is analyzing the underlying components of the Personal Consumption Expenditures (PCE) price index to determine whether recent inflation pressures are as broad-based as headline readings suggest.
"I think there’s this sentiment out there that the data is always right," Blancato said, noting that PCE data plays a central role in Fed policymaking and could become a subject of debate within the central bank. "I think there’s going to be some push-pull inside the Fed as to what data they’re using and how accurate it is. So, we’re trying to get ahead of that."
At the symposium, Warsh reinforced the Fed's focus on inflation, bolstering expectations that policymakers could raise rates in September. He said the central bank would have "more work to do" if officials were not confident inflation was returning to its 2% target, adding that recent price data had not changed the underlying trend.
The remarks were Warsh's clearest signal yet that additional rate increases may be needed, particularly with financial conditions remaining relatively loose despite the Fed's tightening campaign.
Fed funds futures now imply a 64% chance of a September rate increase, up from 35% before Warsh's speech.
With policymakers no longer providing forward guidance, investor attention is increasingly focused on incoming economic data.
The Fed has established five task forces to review its operational and monetary policy frameworks, including one examining the economic data used in policymaking. While Warsh has expressed interest in alternative inflation measures that may show less price pressure than PCE, Friday's remarks suggested the central bank remains firmly committed to its long-standing 2% inflation target.
Blancato said a decision to leave rates unchanged, coupled with any reassessment of inflation data, could support equities, though he emphasized that such a scenario has yet to materialize.
"If this is going to be a lot of ado about nothing, and the hike doesn’t happen, … you could have great success in equities," he said. "We're trying very hard to keep ourselves laser-focused to see if that develops."
If inflation remains stuck above the Fed's target, however, Blancato expects a more subdued market environment in which investors would need to focus more on income-producing assets and inflation-resistant sectors rather than relying on further expansion in equity valuations.
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