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Following US Fed Chairman Kevin Warsh’s speech at the Jackson Hole Symposium, traders have sharply increased their bets on a rate hike, with the probability of a hike now at 57%, up from 30% before his speech in Wyoming, according to official CME FedWatch data.
The shift in expectations extends beyond the September meeting. For the meeting on October 28, traders are pricing in a 70% probability of a rate hike. By the final meeting of the year in December, traders are baking in nearly a 90% chance of a rate hike, according to official data from the US Fed.
What did US Fed Kevin Warsh say?
The U.S. central bank will "have work to do" if policymakers do not gain the confidence needed to see inflation heading back to 2%, Federal Reserve Chairman Kevin Warsh said on Friday. His remarks came closer than before to acknowledging that interest rate hikes may be needed to ease price pressures.
"Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job ... our mandate ... and our charge to keep," Warsh said in his keynote speech to the Fed's Jackson Hole economic symposium in Wyoming.
With the labour market stable, inflation still too high and little in financial conditions indicating that the Fed's policy rate is restraining it, Warsh said, "The Fed's predominant focus right now should be on prices."
The remarks drew applause from an audience of global central bankers looking for more than his previous vague promises to deliver price stability, while also unsettled by his refusal to say how he would achieve it. Markets responded to the change in tone by increasing bets on a rate hike next month, even as they continued to price in a healthy dose of scepticism that he will deliver one.
"We're moving up on six years where we've been above target" on inflation, former Philadelphia Fed President Patrick Harker said. "You can't keep saying this is our job" and then not act, he added. "As the old saying goes, actions speak way louder than words."
What is Goldman Sachs saying?
Goldman Sachs continues to expect the Federal Reserve to keep interest rates unchanged in September, despite the more hawkish tone on monetary policy. The brokerage expects both core CPI and core PCE inflation to rise around 0.2% month-on-month in August, which would support its view that the FOMC will remain on hold.
However, Goldman Sachs sees a September rate hike as a possibility if upcoming inflation data comes in hotter than expected. It said a firmer-than-expected August CPI and PPI reading could prompt the Fed to raise rates, although the brokerage's base case remains for no change in September.
Goldman also believes the recent improvement in inflation has not been enough to signal a meaningful shift in underlying price pressures. While PCE and CPI readings this summer were better than expected, the brokerage said they do not indicate that underlying inflation trends have improved significantly.
Inflation remains a concern, according to Goldman Sachs. The brokerage noted that 54% of goods and services in the PCE basket recorded price increases of more than 3% over the past 12 months. While that share is well below the post-pandemic peak of around 77%, it remains significantly above the 32% level recorded during the two decades before the pandemic. Goldman Sachs noted that tariff effects partly account for the elevated reading.
"Why the market is modestly reacting is he (Warsh) is very adamant that the 2% inflation target is going to remain. He is reiterating the hawkishness, but in a more of a consistent way than an incremental way," said Mark Hackett, chief market strategist for Nationwide.
"There's been somewhat misguided thoughts among investors that this would soften a little bit. Clearly, that's not the case," he told Reuters.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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