As we had mentioned in our 26th Aug report “Jackson Hole: Make or Break for Warsh”, Warsh came out as hawkish as he can to regain the market’s credibility yesterday in his 1st Jackson Hole speech. In a hawkish first Jackson Hole speech as Chairman, Kevin Warsh said that with inflation “running above our 2 percent target,” “the Fed’s predominant focus right now should be on prices.” Warsh characterized the inflation numbers as “concerning” and added that “we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed… otherwise, we have work to do.” Warsh also struck an optimistic tone on the labor market, characterizing it as “quite stable” and “consistent with full employment,” and noting that the unemployment rate “remains low by historical standards.” The bond market also took today’s speech as hawkish, with a roughly 10bp increase in the 2-year Treasury yield following its release, one of the largest moves around a Jackson Hole speech in recent years. Markets now price the probability of a September rate hike at slightly above 50%, up from roughly 30% before the speech. The 2-10 US SOFR curve sharply bear flattened from 0.20 to .13 by the close of Friday session. Dollar index too rose sharply post Warsh’s speech from 99.15 to 99.70 by the close of today’s session. Our own view is that Warsh was supposed to come swinging uber hawksih at JH otherwise he will have lost credibility. If he had abstained from any forward guidance, long end bond yields will have gone though the roof about which the US treasury is extremely sensitive. So in a way he is Team Bessent only. His speech yesterday means the bar for a hike is not high if inflation surprises on the upside in the Aug reading on 11th Sep. But we believe both core CPI & core PCE might print 0.2% again. Hence we believe Fed is likely to remain on hold for REMCY26 as recent benign inflation data have reduced the degree of urgency to act and has given the Fed the luxury of considering the political calendar, as has been the case in the past. Another important factor is the fact US has not seen interest rate hikes in an election cycle. Since 1990, there has been no hawkish pivot in H2 of an election year.
