The Fed wants you to get used to higher interest rates

Federal Reserve Chair Kevin Warsh is urging markets to become more independent in interpreting economic data and accepting higher interest rates as a component of a prosperous economy, according to Helen Thomas. At his Jackson Hole address, Warsh stressed that investors should track real information across the economy and draw their own conclusions, rather than relying on Fed guidance.

Despite acknowledging strong business capital expenditures and a labor market consistent with full employment, Warsh did not signal an imminent aggressive hiking cycle. He wanted markets to make up their own minds about interest rates. The Federal Reserve had previously played a crucial role in steering markets away from deflation during the global financial crisis.

However, the current environment is different, as Japanese inflation has risen above the central bank's target, driving up yields across developed-country government bond markets. The US government spends more on interest than on defense, with annual interest expenses reaching a record 18.5% of federal government revenue. Warsh argued that higher interest rates are not necessarily a sign of disaster, especially in a world of high growth and high inflation.

He aimed to break the Pavlovian response where investors believe higher rates lead to disaster, and he wanted markets to tolerate short-term volatility for long-term benefits. President Trump's frustration with the Fed's actions further highlights the challenge Warsh faces in changing market perceptions.