Fed Chairman Warsh shows courage with Jackson Hole speech, defying political pressure, says Harvard's Rogoff

Federal Reserve Chairman Kevin Warsh delivered exactly what Wall Street was clamoring for this week: drawing a line in the sand against inflation while offering clarity on how the central bank would respond to rising prices.

Harvard professor and former chief economist of the International Monetary Fund, Ken Rogoff, said Warsh made it clear that if the inflation data didn't improve, he's going to hike interest rates.

"That surprised me because my layman political economic view of the situation was that if the Fed could possibly put that off until after the midterms, it would be good for the Fed as an institution," Rogoff said in an interview.

"By hiking, they demonstrate independence. On the other hand, democracy is under assault, and if he hikes rates, you just don't know what the consequences are going to be."

Rogoff predicts that if the Fed raises rates at its September policy meeting, the central bank will face fierce backlash from President Trump. Following Warsh's speech, market odds for a September rate hike surged to 60%, up from 35% the previous day.

"If Trump gets trounced in the midterms, and they hike rates in September, they're going to take a lot of heat over it and not in a minor way," he said. "It took some courage to do what he was doing, but I think, he felt if he laid it out clearly, he didn't say he was going to hike."

Rogoff originally expected Warsh to merely signal a future September hike rather than pull the trigger.

"This clearly opened the door to a hike if the data supports it, and I think the data have to solidly support it," he said.