September Rate Hike Expectations Surge After Warsh's Hawkish Comments

Recent inflation readings have reignited speculation about an upcoming interest rate hike by the Federal Reserve. The market's expectations for a September increase sharply rose to 66.1% following a speech by Fed Chairman Kevin Warsh at the Jackson Hole, Wyoming symposium on Friday.

This marks a significant shift from the previous week, when markets saw little likelihood of an increase before December. Warsh stated that policymakers must be confident inflation is moving towards their objective 'clearly and at sufficient speed' or else 'we have work to do.'

However, some economists and officials questioned whether the market reaction was warranted. Treasury Secretary Scott Bessent argued that core inflation had remained 'very, very restrained,' while Citigroup economist Andrew Hollenhorst pointed out that Warsh's comments were only marginally more hawkish than usual.

The Fed will consider additional labor, housing, consumer spending and inflation reports before its decision. A Dallas Fed measure excluding extremes held at 2.3%, while the July personal consumption expenditures inflation reading showed headline inflation at 3.7% and core inflation at 3.3%. Three consecutive weak nonfarm payrolls reports have raised questions about labor-market momentum.