Warsh's Hawkish Tone Boosts Inflation Fears, Yet Rate Hike Odds Rise

Investors received some reassurance from Federal Reserve Chair Kevin Warsh that the central bank will take action to curb inflation, which has consistently exceeded its 2% target. In a speech at the Jackson Hole symposium in Wyoming, Warsh emphasized the need for policymakers to be confident that underlying inflation is returning to its target rate.

Warsh's comments were seen as more hawkish than expected by markets, with the U.S. Treasury 2-year yield rising to 4.34%, its highest level in a month, according to LSEG data. Fed funds futures suggested a 57% chance of a rate hike at the next meeting in September, up from 35% odds just before Warsh's speech.

While some investors were heartened by Warsh's words, others remained uncertain about the central bank's reaction function. 'I still think that there’s plenty of room here for him to operate,' said Michael Arone, chief investment strategist at State Street Investment Management. 'I haven’t concluded that they’re going to raise rates.'