Warsh's Hawkish Message Sends Fed Rate Hike Odds Soaring

Fed Chair Kevin Warsh's hawkish message at Jackson Hole has markets anticipating a rate hike in September. In his speech, Warsh emphasized that inflation poses a more serious challenge than employment and signaled he would act if underlying inflation does not converge on the 2% target quickly enough.

The Treasury market reacted immediately to the speech with yields rising across all maturities. The two-year yield jumped to its highest level in a month, while the 10-year yield rose to its global benchmark of 4.72%. The dollar index also increased by 0.55% to 99.7.

Financial markets are now leaning towards the view that Warsh could push through a rate increase as early as the September 16 FOMC meeting, with Fed funds futures putting the odds at 57.0%, up from 39.9% a week earlier.

However, there is caution against raising rates before the November midterm elections given President Trump's preferences. TS Lombard notes that the long-term bond market will continue to signal its view on policy direction and whether the Fed can respond quickly enough.