Warsh Hawkish Comments Spark Rate Hike Fears and AI Trade Speculation

At the Jackson Hole Symposium, Federal Reserve member Kevin Warsh surprised investors by taking a hawkish tone on inflation. Speaking last Friday, Warsh stated that underlying trends have not meaningfully improved and that the Fed's focus should be on prices. He emphasized the need for confidence in underlying inflation moving towards the 2% objective 'clearly and at sufficient speed,' which many interpreted as a sign of a potential rate hike in September or shortly thereafter.

The CME Group's FedWatch Tool puts the odds of a quarter-point hike in September at 63.9%. Warsh also mentioned the trimmed mean PCE, an inflation gauge that excludes extreme price swings to expose underlying trends. The latest figure came in at 2.3%, which some saw as dovish, but Warsh turned it against the doves by stating that none of the gauges, including the trimmed mean, has made it back to 2%.

Despite his hawkish comments, Warsh's tone on AI did not necessarily signal a threat to the AI trade. In fact, Luke Lango's framework suggests that a rate hike could be 'the distasteful but effective medicine' that keeps the AI bull alive. The market responded to Warsh's comments with an increase in short-term yields and little change in long-term yields.