Warsh Era Brings Rate Hike Odds to US Economy

The Federal Reserve's interest rate policy is shifting as Kevin Warsh settles into his role as Fed chair. The latest data on inflation and labor markets suggests that Warsh and his colleagues will focus on maintaining low and stable inflation.

Futures traders and the bond market anticipate at least two quarter-point rate hikes by the end of this year, with a possibility of up to four increases. The federal funds futures market assigns a 61% probability of two or more quarter-point hikes this year, while the same market gives a 32% chance of a single quarter-point cut and a 7% likelihood that the Fed will hold the target rate steady.

The two-year Treasury yield currently stands at 4.33%, which is 0.7 percentage points above the effective federal funds rate of 3.63%. This suggests that bond traders expect the rate to rise by about 0.7 percentage points in the coming months, equivalent to nearly three quarter-point cuts.

The recent decline in inflation was largely due to a significant decrease in energy costs, but with Brent crude climbing back above $96 a barrel and gasoline prices rising once more, inflation is expected to surge again.