Since Kevin Warsh began his term as Federal Reserve chairman, the main change has been a clear shift in communication style, with less reliance on forward guidance. All else being equal, this should translate into greater interest rate volatility than we were used to.
Furthermore, the working groups announced during the press conference should lead to changes in the Fed’s various functions, and the implementation of their conclusions will help increase volatility. Warsh will lead a data-dependent committee, which will likely allow him to more easily control the Federal Open Market Committee (FOMC) narrative and build consensus on decisions made meeting by meeting.
At the ECB’s Sintra Forum, in his speech Warsh reiterated his position in favor of limiting the use of forward guidance. However, he also noted that inflation risks have diminished since the June FOMC meeting, thanks to the drop in oil prices and market measures of inflation expectations.
Warsh also spoke about the AI boom, emphasizing that it is increasing demand and forecasting that, over time, the benefits will extend to the supply side of the economy as well. While avoiding explicit comments on whether AI is inflationary or not, he referred to higher structural productivity and a higher potential growth rate, consistent with some of his statements last year on strengthening the supply side of the economy. These remarks show a slight dovish openness compared to the more restrictive stance taken during the press conference following the June FOMC meeting.
The labor market remains stable
Employment data came in weaker than expected, with growth below forecasts and downward revisions to previous months. Nonetheless, the three-month moving average of 111,000 new jobs continues to support our thesis that the labor market hit bottom last year.
Notably, there was a sharp drop in the labor force participation rate among prime-age workers (25-54 years) recorded in June. This kept the unemployment rate unchanged despite the decline in employment reported by the household survey, and the drop was mainly driven by the 25-34 age group. However, the wide fluctuation of this statistical series raises some doubts about its accuracy. The Fed continues to focus primarily on the unemployment rate (ratio of unemployed to labor force), whose stability in recent quarters remains the main signal to monitor.
Overall, the labor market appears to be in a delicate balance, although the pace of new job creation has not proven as weak as many feared last year. This is particularly evident in light of the initial indications from annual statistical revisions, which show a stronger employment trajectory in 2025 than initially reported.
