Warsh Shifts Tone, Rate Hike Bets Skyrocket as Fed Markets Test His Inflation Resolve

Kevin Warsh's speech at Jackson Hole shifted sentiment in financial markets, with interest-rate traders now putting the probability of a rate hike in September at roughly two-thirds.

This is up from around one-third before the speech, and economists at Barclays, Société Générale, and Deutsche Bank are also now expecting rate hikes in September and December.

Warsh reaffirmed his commitment to the 2% inflation target and stressed that the policy rate is the Federal Reserve's main tool for achieving that goal. He acknowledged that core inflation has not shown meaningful improvement in recent months and said policymakers should focus on broad trends rather than individual data points.

The next Federal Open Market Committee meeting will take place in less than two weeks, and Warsh faces pressure to ensure his words on inflation are backed up by a vote for an appropriate decision. The August nonfarm payrolls data due on Friday, as well as the August consumer price and producer price indexes due next week, will be decisive factors.