Markets price in possible Fed rate hike after Warsh remarks

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Highlights

Probability of a Fed rate hike at the September 15-16 FOMC meeting jumps to 66.1% after Warsh's Jackson Hole remarks, nearly double prior levels.
Warsh states recent soft inflation data do not indicate adequate progress, signaling the Fed requires stronger evidence of inflation moving toward target before pausing hikes.
July personal consumption expenditures inflation registers at 3.7% headline and 3.3% core, while disagreement persists among Treasury, Citigroup, and banks on the likelihood of a near-term hike.

Jackson Hole remarks reshape September expectations

As reported by CNBC, markets reverse their earlier view on the Fed path after Warsh's keynote speech Friday at the central bank's annual symposium in Jackson Hole, Wyoming. Before the speech, investors see little likelihood of a rate increase before December, but pricing later moves to show a high probability of action at the Sept. 15-16 Federal Open Market Committee meeting.

Warsh says recent soft inflation readings are not enough to show a meaningful improvement in underlying trends. He says policymakers must be confident inflation is moving toward the Fed's objective clearly and at sufficient speed, or more work remains to be done.

The repricing is visible in CME Group's FedWatch data, which shows the probability of a move at the September meeting rising to 66.1% on Monday, nearly double the level seen before Warsh spoke. The comments also stand out because markets had reacted more cautiously to his July pledge that the Fed would not waver in pursuing 2% inflation.

Data and dissent cloud the policy outlook

Not সবাই accepts the market's hawkish interpretation. Treasury Secretary Scott Bessent says he sees a supply shock and argues policymakers traditionally do not raise rates into that environment unless broader inflation effects appear, while noting that core inflation remains restrained.

Citigroup economist Andrew Hollenhorst writes that Warsh's latest comments are only marginally more hawkish than usual and says recent figures show no urgent need for tighter policy. He says there is no consensus for a September hike, pointing to cooler inflation and softer hiring since the July FOMC meeting.

The Fed still receives several key reports before deciding, including employment data, housing indicators, consumer and producer price indexes, and retail sales on the day of the rate decision. July personal consumption expenditures inflation stands at 3.7% on the headline measure and 3.3% on core, while a Dallas Fed trimmed measure holds at 2.3%, much closer to the central bank's target.

David Kelly of JPMorgan Asset Management says the labor market may be the most important factor and argues the economy shows less momentum than Warsh suggests. Bank of America takes the opposite view and maintains its call for three rate increases ahead, saying Warsh has raised the bar for leaving policy unchanged unless incoming data deliver a material downside surprise.

In our earlier coverage of the market setup heading into September, we noted that several indicators were sitting near key thresholds, with traders closely watching whether higher Treasury yields and low volatility could quickly flip sentiment. We also pointed out that after Kevin Warsh’s Jackson Hole signal, markets lifted the implied odds of a September rate hike above 50%, adding uncertainty just ahead of the next FOMC decision.

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