Warsh Signals Hawkish Stance as Rate Hike Odds Rise

At Jackson Hole, Federal Reserve Chair Kevin Warsh delivered a more hawkish speech than at his previous FOMC press conference. He emphasized that inflation is 'concerning' and the Fed's primary focus should be on prices.

The yield on the 2-year U.S. Treasury note jumped by roughly 7 basis points following the speech, with the probability of a rate hike in September climbing from about 30% to over 50%. However, major banks JPMorgan and Goldman Sachs remain skeptical of an immediate rate hike.

JPMorgan maintains its baseline forecast of a December rate hike, citing that August's nonfarm payrolls and CPI data will be the 'more important news' determining the outcome of the September meeting. Goldman Sachs expects both the August core CPI and core PCE to post month-over-month increases of around 0.2%, at which pace the FOMC is likely to hold steady.

Warsh highlighted that underlying inflation trends show no substantial improvement, with more than half of goods and services in the PCE basket experiencing price increases exceeding 3% over the past 12 months. He also acknowledged that wage growth has been 'moderate' but noted that wages have 'for a long time failed to serve as a reliable indicator of future inflation.'