The Warsh pivot markets didn't expect

Investing.com -- BCA Research said Federal Reserve Chair Kevin Warsh used his first Jackson Hole speech to reset his communications approach, delivering a message far closer to conventional central banking than his early meetings suggested.

After what the firm called mixed reviews of his first two meetings, Warsh "laid out a reaction function broadly in line with the rest of the FOMC," BCA strategist Felix Vezina-Poirier wrote.

He gave no guidance for the September meeting, where markets now price roughly even odds of a hike, but detailed how he would respond to incoming data.

Importantly, BCA noted Warsh reiterated the Fed's commitment to a 2.0% PCE inflation target after leaving the door open to changing it in July, and confirmed the Fed funds rate remains the main policy tool for now.

The firm said the data do not warrant a hike yet, with recent labor and inflation prints falling somewhat short of expectations.

While markets moved to price in more tightening after the speech, Vezina-Poirier said the fundamental macro picture is unchanged and it would need to see labor and inflation surprises reaccelerate before turning more bearish on front-end rates.

BCA also expects core PCE inflation to move lower as extreme price moves fade. Twelve-month core PCE is running 88 basis points above core CPI, but the spread between trimmed mean PCE and CPI is only 29 basis points. Its strategists expect the Fed funds rate to stay near current levels.

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