4 days ago
Warsh Hawkish Tone Sends Markets Betting on Fed Rate Hikes
Federal Reserve Chairman Kevin Warsh gave a speech about inflation and interest rates.
He said inflation is still too high and has not improved enough.
He also said the Fed’s goal of 2% inflation remains firm.
Because of his comments, investors became more confident that the Fed might raise interest rates soon.
They saw more than a 50% chance of a quarter-point increase in September.
Investors also began expecting another possible increase by December.
Bond yields rose, while technology stocks and Bitcoin fell.
However, markets could change direction if the Fed does not raise rates at upcoming meetings.
Traders raised the probability of a quarter-point Federal Reserve rate hike at the September 16 meeting to above 50%.
Two-year Treasury yields rose 12 basis points to 4.35% after Kevin Warsh’s Jackson Hole speech.
Warsh said inflation was running at 3.7%, underlying trends had not meaningfully improved, and the 2% target remained firm and fixed.
Barclays shifted its forecast to two quarter-point increases, in September and December, after previously expecting no hikes this year.
Higher yields pressured technology stocks and Bitcoin, while the dollar rose and gold fell.
- Who
- Federal Reserve Chairman Kevin Warsh, investors and traders, and economists including Barclays analysts.
- What
- Warsh renewed his hawkish stance on inflation, prompting markets to increase bets on Federal Reserve rate hikes.
- Where
- Jackson Hole, Wyoming, and US financial markets.
- When
- Friday, following Warsh’s speech at the annual Jackson Hole symposium; the next referenced policy meeting is September 16.
- Why
- Warsh said inflation remained above target and underlying trends had not meaningfully improved, increasing expectations that higher rates may be needed.
Case for Higher Rates
Case for Caution
Inflation and monetary policy
Case for Higher Rates
Warsh and market participants argued that inflation remained above the Fed’s target and was not improving quickly enough, supporting additional rate increases.
Case for Caution
Some traders and strategists warned that the Fed could continue holding rates steady, forcing markets to reverse the latest repricing.
Market credibility and communication
Case for Higher Rates
Several analysts said Warsh’s firm language helped rebuild confidence that the Fed would prioritize price stability.
Case for Caution
Other observers said his communications style was adding volatility, with markets reacting sharply to each meeting and risking another reversal.
Sources of bond-market pressure
Case for Higher Rates
Higher interest rates were viewed as necessary amid above-target inflation, large government deficits, heavy new-debt issuance, and strong artificial-intelligence investment.
Case for Caution
The report said rate hikes alone would not resolve pressure on long-term bonds, which was also linked to the nearly $2 trillion annual deficit, debt supply, oil prices, and the Iran war.
Key facts
- Inflation rate
- 3.7%, according to figures cited in the report.
- Federal Reserve inflation target
- 2%, described by Warsh as firm and fixed.
- September rate-hike odds
- More than 50% for a quarter-point increase at the September 16 meeting.
- Two-year Treasury yield
- Rose 12 basis points to 4.35% after Warsh’s remarks.
- Barclays forecast
- A quarter-point hike in September followed by another in December.
- Long-term Treasury pressure
- The 30-year yield had reached its highest level since 2007 before the latest market reaction.
Quotes
George Catrambone
Head of fixed income at DWS Americas
“Call it what you want, but this is the exact forward guidance the market was looking for at the July FOMC meeting. He’s going far beyond what was expected, dismissing wage inflation and claiming policy isn’t really restrictive. It’s a pretty big 180 degree turnaround.”
theprint.in
“He came into this speech at Jackson Hole with the intention of rebuilding that credibility. You look at the market reaction, I think that was very effective.”
theprint.in
Sources
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