Warsh's Hawkish Tone Sparks Dollar Rally as Rate Hike Odds Rise
A hawkish tone from Kevin Warsh at Jackson Hole has significantly increased market expectations of a September Federal Reserve rate hike, boosting the US Dollar and short-term Treasury yields. According to Fed funds futures, there's now a 60% chance of a 25 basis point move on September 16, up from 35% before Warsh's speech.
Warsh questioned whether underlying inflation is moving towards the 2% target at sufficient speed, which has sparked concerns that the Fed may need to do more. This sentiment has led to an increase in short-term Treasury yields and a strengthening of the US Dollar.
The August ISM and jobs data are crucial in keeping a September hike in play, underpinning the USD. The July JOLTS report is expected to reinforce the US labor market's low hire, low fire backdrop, while the August ADP private payrolls are seen at +47k, up from +44k in July.
The unemployment rate is expected to remain at 4.1% for a second consecutive month, tracking below the FOMC 2026 projection of 4.3%. Job creation may be low, but weak labor supply growth and historically low layoffs point to an economy near full employment.