Federal Reserve Chair Kevin Warsh delivered a hawkish message at the annual economic symposium in Jackson Hole, stating the US central bank "will have work to do" if underlying inflation does not return to its 2% target. His comments were seen by markets as a reinforcement of the Fed's commitment to fighting inflation, prompting a significant shift in interest rate hike probabilities. According to CME Group's FedWatch tool, the likelihood of a September rate hike jumped to 55.7% from 35.4% the previous day.
The market reaction to Warsh's speech was swift and broad. Global equities, as measured by MSCI's global gauge, rose by 0.24% to 1,157.46. In the bond market, short-dated US Treasury yields climbed, with the 2-year note yield increasing by 7.84 basis points to 4.312%. The dollar also strengthened, with the dollar index rising 0.36% to 99.47, and the euro falling 0.35% against the dollar to $1.161. These movements reflect investors pricing in a more aggressive stance from the Fed.
Analysts interpreted Warsh's remarks as a clear signal that the Fed is prepared to act to curb inflation. Gary Schlossberg, global strategist at Wells Fargo Investment Institute, noted that Warsh's comments connected the dots for investors, suggesting at least one rate increase, if not more, would be necessary unless inflation significantly recedes. Molly Brooks, a US rates strategist at TD Securities, echoed this sentiment, highlighting Warsh's mention of a stable labor market and strong output as contributing to the market's hawkish interpretation. Warsh had previously avoided giving explicit forward guidance, making his current comments particularly impactful.
