Fed Chair Warsh's hawkish remarks raise rate-hike expectations

Federal Reserve Chair Kevin Warsh surprised attendees at the Jackson Hole economic symposium with a speech that emphasized inflation risks and a commitment to the 2% price-stability goal. The remarks led traders in fed-funds futures to raise the odds of a 0.25-percentage-point rate increase at the September policy meeting to about 60%, up from roughly 56% earlier in the week.

"Chair Warsh's Jackson Hole address surprised us in its specificity about the economy and outlook and with its lean in a decidedly hawkish direction," Deutsche Bank said, adding that it expects a total of 50 basis points of tightening this year, with hikes in September and December.

"The emphasis on inflation risks, together with Warsh's explicit commitment to achieving price stability and his reluctance to pre-commit to future policy actions, reinforces the elevated risks of policy tightening this year," UOB noted.

Analysts highlighted the focus on near-term inflation data, with Nomura stating that Warsh's comments suggested policy could react if disinflation does not accelerate. Tiger Brokers' strategist James Ooi said Warsh's view of robust U.S. economic performance reduces the case for imminent rate cuts and underscores the Fed's independence.

Some market participants expressed doubt about a hike. Matthew J. Maley of Miller Tabak + Co. argued there is no empirical basis for a rate increase and suggested Warsh may be overstating inflation to claim credit later.

Gavekal Research observed that Warsh's reaffirmation of short-term rates as the primary policy tool could put the Fed at odds with the Treasury's plan to increase long-term Treasury buybacks.

The speech also impacted commodities, with Susquehanna noting that expectations of higher rates could strengthen the dollar and reverse the recent rally in gold.