Warsh Regains Hawkish Image but Now Must Back Up Words With Action

U.S. Treasury Secretary Scott Bessent and Federal Reserve Chair Kevin Warsh attended a plenary session as finance ministers and central bank governors from G20 countries met in Asheville, North Carolina.

The financial markets' reaction to Warsh's speech on Friday can be summed up in one word: 'relief.' However, relief should not be mistaken for confidence. To regain that, Warsh has much more work to do.

Warsh addressed the Kansas City Fed's annual gathering of central bankers in Jackson Hole, Wyoming, last week. He avowed his commitment to the Fed's 2-per-cent inflation target and clarified that the policy rate is the Fed's best tool to achieve it. This willingness to pull the lever should circumstances warrant had a strong impact on rates traders.

Traders flipped to pricing in a roughly two-in-three chance of a September rate hike from a one-in-three chance before the speech. Economists at Barclays, Societe Generale, and Deutsche Bank are among those now penciling rate hikes in September and December.