US Federal Reserve Chairman Kevin Warsh has strongly indicated that the central bank is prepared to raise interest rates as soon as September if inflation remains stubbornly above its 2% target. In a recent speech, Warsh emphasized that price pressures, fueled by higher energy costs and demand from the artificial intelligence boom, have not meaningfully slowed. This stance has led analysts to believe that Warsh has little choice but to increase rates this year. Federal funds futures now show an implied probability of a September rate hike exceeding 50%, up from approximately 35% before his speech. Barclays and Societe Generale analysts now predict a quarter-point hike in September, followed by another in December.
The hawkish tone from Warsh is further supported by the latest US jobs report, which is expected to show a 55,000 increase in payrolls for August, indicating a stable labor market. Warsh himself described the labor market as being in good health, suggesting that softer job gains are more a matter of demographics than economic decline. This stability allows the Fed to focus more intently on its primary mandate of price stability, given that inflation has remained well above the 2% goal for several years. Economists and investors are now looking for further clues about inflation from upcoming industry reports.
The geopolitical landscape also features prominently, with the US-Iran conflict now in its sixth month, largely settled into a prolonged stalemate. President Donald Trump has refused to extend a 60-day truce and has shifted the US strategy towards economic pressure, including secondary sanctions, rather than further military escalation. Despite this, attacks in the Strait of Hormuz continue, keeping oil prices volatile. Front-month Brent crude futures have gained almost 20% since the war began, though they are about one-third lower than their April peak of $126.41 a barrel. Equity markets have largely shrugged off the conflict, with a broad global rally driven by corporate earnings optimism. Experts believe a near-term resolution to the conflict is unlikely, as both sides appear unwilling to escalate or make concessions.
