Fed Rate Hike Odds Rise as 'Warsh Shadow Rate' Hits Historic High

Citi Research has created a new indicator called the 'Warsh shadow rate', which suggests that the Federal Reserve may be on track to deliver a September interest rate hike. The indicator is based on the economic and financial indicators highlighted by Fed Chair Kevin Warsh in his recent Jackson Hole speech.

According to Citi, these indicators are predominantly showing a hawkish signal, while many of the measures downplayed by Warsh have softened. The key test will be August's inflation reading, with a 0.3% or higher rise in core CPI making a hike more likely and a 0.1% increase potentially postponing it.

A stronger-than-expected inflation reading could push Treasury yields higher and weigh on gold, while stocks may prove more resilient unless rising rates are accompanied by a sharp jump in volatility.