Warsh Cornered: Will He Hike Rates Amid Rising Odds?

Kevin Warsh is facing a difficult decision ahead of the September FOMC meeting. After his recent address in Jackson Hole, where he emphasized the importance of price stability, market-implied odds of a rate hike from the Fed have risen to nearly 90%. This has put Warsh in a corner, as he will either need to follow through on his hawkish stance and raise rates or risk facing a market revolt.

The recent economic data suggests that inflation is not moving towards the Fed's objective at a sufficient pace. Core CPI increased by 0.3% in August, more than double the rate consistent with a 2% annual rate. Additionally, PPI rose more than expected, and Brent crude prices surged to nearly $110.

Warsh will need to hike rates to maintain the Fed's credibility and independence. A hold would likely trigger a bullish reversal at the front-end and potentially a bear move at the long-end of the market.