Fed Chair Warsh bolsters expectations of a rate hike in September
Financial markets raised their estimate of the probability that the US Federal Reserve will increase interest rates in September after Fed Chair Kevin Warsh spoke at the Jackson Hole symposium. According to CNBC, market participants saw in his statements the regulator’s readiness to recommend a rate hike because of inflation risks.
After Warsh’s speech on August 28, the probability of a rate hike at the September 15–16 meeting of the Federal Open Market Committee rose to 66.1%, according to CME Group FedWatch data. Before the Fed chair’s speech, markets had largely not expected a rate hike until at least December.
Fed chair’s position
Warsh acknowledged that recent inflation readings had been moderate, but said this was not enough to consider underlying inflation trends to have improved substantially. According to him, the Fed must be confident that inflation is moving toward the regulator’s target level clearly and quickly enough.
In July, headline inflation measured by the personal consumption expenditures index was 3.7%, while core inflation was 3.3%. At the same time, the Dallas Federal Reserve Bank’s measure, which excludes extreme values, remained at 2.3%, closer to the Fed’s 2% target.
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Arguments against policy tightening
US Treasury Secretary Scott Bessent told CNBC that the economy had experienced a supply shock and that, under such circumstances, rates are traditionally not raised without signs of secondary or tertiary effects. He also noted that core inflation remains very subdued.
Citigroup economist Andrew Hollenhorst believes that Warsh’s comments were only slightly more hawkish than his previous statements. In his view, new data point to easing inflation and hiring, so there will be no consensus on a rate hike in September.
Before the September meeting, the Fed will receive data on employment, the housing market, consumer spending, as well as consumer and producer price indexes. JPMorgan Asset Management Chief Global Strategist David Kelly believes that the situation in the labor market may deter the Fed from raising rates. Meanwhile, Bank of America maintained its forecast of three future hikes and believes that Warsh raised the threshold for keeping rates unchanged.
