Warsh's Hawkish Signal Boosts Rate Hike Odds Amidst Continued Skepticism

Federal Reserve Chair Kevin Warsh made his first Jackson Hole appearance as chair, sending a more hawkish signal than at the July FOMC press conference. Inflation is 'concerning,' and if the underlying inflation trend does not return to target at a 'sufficient pace,' 'we still have work to do.'

Warsh devoted a considerable portion of the speech to inflation, acknowledging that this summer's PCE and CPI readings were 'better than expected.' However, he pivoted by stating that 'That does not tell me that the underlying trend has materially improved.'

The 2-year Treasury yield jumped about 7 basis points after the speech was released, and the probability of a September rate hike climbed from about 30% to more than 50%. However, JPMorgan maintained its baseline forecast of a December rate hike, with economist Michael Feroli saying that 'the more important news' for determining the outcome of the September meeting would be the upcoming August nonfarm payrolls and CPI reports.

Goldman Sachs expects both August core CPI and core PCE to rise about 0.2% month-over-month, and on that path the FOMC will stay on hold. Warsh's speech also revealed that at the July FOMC meeting, 'I and most of my colleagues believed that the wiser course was to wait for new information during the intermeeting period before deciding whether it was necessary to adjust interest rate policy.'

JPMorgan maintained its December rate hike forecast, with Feroli acknowledging that given the growing number of Fed officials sending hawkish signals, acting earlier 'would not be unreasonable.' Goldman Sachs was more definitive, stating that a September hike is possible only if August CPI and PPI data come in stronger than expected.