Warsh's Hawkish Tone Shifts Fed Stance Towards September Rate Hike
According to ING's James Knightley, the Federal Reserve has shifted its reaction function towards a September rate hike. This change in stance is attributed to Kevin Warsh's keynote address at the Jackson Hole Symposium.
Warsh emphasized the importance of controlling inflation, which has been above target for 65 consecutive months, and highlighted that financial conditions are not tight despite full employment. Knightley notes that this hawkish tone from Warsh has altered the Fed's approach, making a rate hike more likely unless data justifies a pause.
The key August data points to watch will be the September jobs report and the CPI print on September 11. Previously, ING believed it would take a non-farm payrolls figure of 75k+ and core CPI above 0.3% month-on-month for a rate hike. Now, they expect a jobs figure below 25k or net job losses to prevent/delay a hike.
Knightley also points out that Warsh's credibility is at stake if he goes hawkish again in August only to turn dovish in September. With no one on the FOMC openly hostile to a rate hike, ING believes a 25bp increase now looks more likely than a hold.