Warsh's Hawkish Speech Sparks September Rate Hike Odds

Kevin Warsh's first Jackson Hole speech as Federal Reserve Chairman has raised odds of a September rate hike. The hawkish tone of his speech sent 2-year US Treasury yields higher, indicating a high probability of a Fed rate hike at its September 16 meeting.

Fed funds futures are pricing in a 58% probability of a 25-basis-point (0.25%) Fed rate hike at the September meeting, up from a 36% chance before Warsh's speech. The increase suggests that investors believe the Fed will act to return inflation to its 2% goal.

The Cleveland Fed's current estimate for August PCE puts it at 3.8% year-over-year, while the 3-month annualized rate should fall to 1.8%. To better gauge the underlying trend without the volatile energy component, the Cleveland Fed's current estimate for August core PCE puts the year-over-year rate at 3.4%, while the 3-month annualized rate should fall to 2.7%.