Warsh's Hawkish Jackson Hole Speech Surprises Markets with Inflation Focus

At Jackson Hole, Federal Reserve Chair Kevin Warsh delivered a keynote speech that surprised markets. He did not promise a September rate increase but instead emphasized the need for policymakers to focus on prices and control inflation. The economy is resilient, labor markets are stable, and financial conditions are difficult to call restrictive, according to Warsh.

The market reaction was immediate, with the probability of a September rate increase jumping from 35% before the speech to around 60% afterward. The 2-year Treasury yield rose by about 11 basis points to 4.34%, and the dollar index gained around 0.6%. EUR/USD fell toward $1.161, and USD/JPY pushed back toward 160.

Crypto saw a significant drop, while US equities initially whipsawed before settling into a much more muted reaction than the bond and currency markets. Warsh's speech reinforced a surprisingly strong macro backdrop: robust investment, high corporate profits, narrow credit spreads, and a labor market he considers healthy.