Warsh's Hawkish Tone Shifts Fed Stance on Interest Rates

Kevin Warsh's recent speech at Jackson Hole has shifted the Federal Reserve's stance on interest rates, according to ING economist James Knightley. Before the speech, many were expecting the Fed to be patient and hold rates steady until 2027, but Warsh emphasized a focus on inflation and full employment, which has changed the way the market thinks about the September rate decision.

The August data points, including the jobs report and CPI print, will now require less robust numbers for the Fed to hike. ING previously thought it would need a non-farm payrolls figure of 75k+ and core CPI at 0.3% MoM or above, but now believes even weaker numbers could lead to a rate increase.

Knightley also pointed out that Warsh's hawkish tone is consistent with his previous speeches in June and July, where he sounded aggressive before backing down. This time around, it seems more likely that the Fed will hike rates by 25 basis points in September rather than holding steady.