- Kevin Warsh delivered a hawkish speech at the Jackson Hole symposium, indicating that further rate hikes may be necessary if inflation does not return to the Federal Reserve's 2% target.
- Following Warsh's remarks, markets increased bets on a September rate hike, with a 60.4% chance now priced in according to the CME Group's FedWatch tool.
- Barclays has revised its forecast, now expecting two 25-basis-point hikes in September and December, following Warsh's notably hawkish speech.
- Treasury yields have ticked lower as the U.S.-Iran war has moved back into the spotlight, with investors closely monitoring developments.
- Warsh emphasized that inflation was too high and that financial conditions were not restrictive, indicating that price stability remains the Fed's priority.
- Previously, Barclays had expected the Fed to keep rates unchanged for the remainder of the year, but now anticipates two hikes due to Warsh's comments.
- The Iran war has escalated, with the U.S. targeting Iranian sites and Tehran retaliating by attacking U.S. bases in Jordan.
Barclays has revised its forecast, now anticipating two 25-basis-point interest rate hikes from the Federal Reserve this year, one in September and another in December. This shift follows Kevin Warsh's hawkish speech at the Jackson Hole symposium, where he stated that policymakers would "have work to do" if inflation does not align with the 2% target.134
Warsh's comments highlighted that inflation remains too high and that financial conditions are not restrictive, indicating that price stability is the Fed's priority. Barclays noted that Warsh's speech was "notably hawkish" and implied further tightening might be necessary despite his reluctance to provide explicit forward guidance.6
The market is responding, with a 60.4% chance of a rate hike in September now priced in, according to the CME Group's FedWatch tool. This is a significant increase from 35.4% the day before Warsh's address.2
In the bond market, Treasury yields fell slightly as investors reacted to both Warsh's remarks and renewed tensions in the Middle East. The yield on the benchmark note was 1 basis point lower at 4.712%, while the longer-dated yield remained flat at 5.21%.5
The ongoing conflict in Iran has also captured investor attention, with the U.S. striking Iranian targets and Tehran retaliating against U.S. bases in Jordan. This geopolitical tension has contributed to fluctuations in oil prices, with crude jumping almost 3% on Monday morning.
As the market awaits further economic data, including the ISM Manufacturing PMI and non-farm payrolls, investors are keenly observing the Fed's next moves.
“Markets now price a 59.9% chance of a September hike, up from 35.4% before Warsh's address, according to CME FedWatch. Barclays notes Warsh's speech was 'notably hawkish' and offered an implicit case for further tightening despite his opposition to forward guidance.”
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