Markets Misprice Hawkish Fed as Deflation Fears Grow

Financial markets are pricing in a hawkish Federal Reserve, assigning a 40% probability to a 25 basis point hike this Wednesday.

However, recent core CPI inflation data for June shows no signs of overheating, according to Kevin Warsh's intuition. He believes the economy may be experiencing deflation due to AI eliminating white-collar jobs.

Warsh thinks it would be a huge mistake for the Fed to hike rates, as it could fuel a narrative that the Fed is ignoring inflation and exacerbate market volatility.