Warsh's Hawkish Tone Boosts Rate Hike Odds

Federal Reserve Chairman Kevin Warsh's speech at the Jackson Hole symposium has led to increased expectations of rate hikes. Markets are now pricing in a 54% chance of a September rate hike, up from 34% before the speech.

Warsh stated that he would be hard pressed to describe broad financial conditions as restrictive and emphasized the need for confidence that underlying inflation is moving towards the Fed's objective at sufficient speed. He noted that while recent readings on inflation were better than expected, they do not indicate meaningful improvement in underlying trends.

While some analysts believe a rate hike could come in September, others are less convinced. Michael Arone, chief investment strategist at State Street Investment Management, thinks the markets are overreacting and that Warsh has given himself plenty of flexibility to adjust policy without raising rates immediately.