Warsh's Hawkish Speech Spikes US Dollar Momentum

A surprise hawkish speech by Fed Chair Kevin Warsh at Jackson Hole has given the US dollar fresh momentum. Markets had previously priced in a possibility of two Fed rate hikes, and Warsh's comments have increased that probability to roughly 50%. He stated that monetary policy is not currently restrictive and expressed little confidence that inflation is slowing sustainably.

The yield curve's response to Warsh's speech has been significant, with a bear steepener emerging as short-term bond yields rise faster than long-term yields. This signals that the Fed may be preparing to raise interest rates. Derivatives markets now put the odds of two rate hikes in 2026 at roughly 50%.

Warsh's comments have also had an impact on market expectations regarding the Fed's September rate decision. Only weak employment or inflation data ahead of the FOMC meeting could alter the outlook, and otherwise the Fed may be forced to tighten monetary policy.