Warsh Rejects Market Hopes for Rate Cuts

Kevin Warsh's keynote speech at Jackson Hole has sent shockwaves through the market. Investors had been hoping for some accommodation from the Federal Reserve, but Warsh put inflation firmly ahead of market concerns, sending Treasury yields higher and pricing a 61% probability of a September rate hike.

This change in expectations is causing concern among strategists, who argue that even if corporate earnings remain strong, the assumption that the Fed will eventually lower rates has changed. Scott Chronert from Citigroup noted that 'the presumption of higher rates does present a sentiment headwind', implying that investors may be less willing to pay high prices for stocks.

Warsh's speech also highlighted the Fed's focus on inflation, which remains above the 2% target. He warned that unless policymakers become confident that inflation is returning towards target quickly enough, the Fed still has work to do, suggesting that tighter policy may be necessary.

Matt Maley from Miller Tabak sees a larger vulnerability underlying the reaction, arguing that stocks and bonds have spent more than 15 years benefiting from easy monetary policy and quantitative easing. Warsh's approach marks a significant departure from previous Fed regimes, which provided more reassurance to markets.