- Warsh delivered hawkish remarks at the Jackson Hole economic symposium, emphasizing the inflation target and implying policy may need to react if disinflation is not occurring with speed.
- Traders of fed funds futures see a 60.4% chance of a quarter-point hike in September, up from Friday.
- Deutsche Bank expects the Fed to hike 50 basis points this year, with increases at the September and December FOMC meetings.
- Gavekal Research says Warsh's reiteration that short-term rates should remain the main instrument implies he will continue to shorten the average duration of the Fed's balance sheet, putting the Fed at odds with the Treasury.
- Susquehanna notes Warsh pledged to return inflation to the 2% target and indicated rates could rise further, strengthening the dollar and reversing part of the debasement trade that had lifted gold roughly 14% in August.
- UOB noted that 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.
- Matthew J. Maley believes that there remains no empirical basis for the rate hike, and said Warsh appears to be talking up inflation so that he can claim credit for taming it when headline measures inevitably come down.
- According to James Ooi, Warsh's assessment that U.S. economic performance has been robust was seen as reducing the case for near-term rate cuts.
Federal Reserve Governor Kevin Warsh's recent speech at the Jackson Hole economic symposium has significantly influenced market expectations, raising the likelihood of a quarter-point rate hike in September to 60.4%.
Deutsche Bank noted that Warsh's address was unexpectedly specific regarding the economy and outlook, leaning decidedly hawkish. The firm anticipates a total of 50 basis points in rate hikes this year, with increases expected at both the September and December Federal Open Market Committee meetings.
Warsh's focus on inflation risks and his commitment to achieving price stability suggest a potential tightening of policy, although UOB cautioned that this could be mere rhetoric without subsequent action.
Nomura highlighted the Fed's heightened sensitivity to near-term inflation data, while Warsh's assertion that the U.S. economy remains robust diminishes the case for immediate rate cuts, according to James Ooi of Tiger Brokers.
Matthew J. Maley from Miller Tabak + Co. expressed skepticism about the empirical basis for a rate hike, suggesting that Warsh's comments may be aimed at positioning himself favorably as inflation metrics improve.
Furthermore, Warsh's insistence on using short-term interest rates as the primary monetary policy tool indicates a potential conflict with the U.S. Treasury, which is increasing its buybacks of long-term securities to manage rising yields.
Overall, Warsh's remarks reinforce the Fed's independence and credibility, as he aims to return inflation to the 2% target, potentially strengthening the dollar and impacting gold prices, which saw a significant rise in August.
“Deutsche Bank expects 50 basis points of hikes this year, with increases at the September and December FOMC meetings. Meanwhile, Gavekal Research warns Warsh's balance-sheet stance conflicts with the Treasury's stepped-up buybacks of long-term securities.”
CNBC
