Warsh Shifts Tone, Markets Price in Rate Hike as Credibility on the Line
Federal Reserve Chair Kevin Warsh's speech in Jackson Hole, Wyoming, marked a shift towards a more hawkish stance on inflation, but it was not without controversy. The speech sparked a rate hike market reaction, with rates traders pricing in a roughly two-in-three chance of a September rate hike.
Warsh emphasized his commitment to the Fed's 2% inflation target and clarified that the policy rate is the best tool to achieve this goal. He indicated a willingness to pull the lever should circumstances warrant, which was seen as a hawkish shift compared to his previous public remarks.
The speech was an opportunity for Warsh to regain credibility after his poorly received press conference following the Fed's policy meeting in July. However, it also highlighted how much he had misfired since taking over from Jerome Powell at the end of May.
Warsh faces pressure to back up his words with action, particularly with the next FOMC meeting only two weeks away. The August nonfarm payrolls report and inflation reports will be closely watched to determine whether rates should be raised.