JACKSON HOLE
Federal Reserve Chair Kevin Warsh opened the door to a September rate increase at the Kansas City Fed's annual economic symposium, citing inflation that remains "too high" and lacks meaningful improvement in underlying trends.
Traders immediately repriced the odds. CME FedWatch futures now show 60 percent probability of a 0.25 percent rate hike in September—a 25-point swing from 35 percent the prior day. The benchmark would land at 3.75 percent if the Fed acts.
Warsh's remarks centered on the breadth of price pressures. Over the past 12 months, 54 percent of goods and services in the Personal Consumption Expenditures basket posted increases above 3 percent, well above the 32 percent average from 2000 through 2019. Over six months, 49 percent sit above 3 percent annualized. While both figures have retreated from post-pandemic peaks of 77 percent, they signal persistent stickiness across the economy.
"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do."
The bond market's reaction was swift. Longer-dated Treasuries fell as investors repriced duration risk upward. Gold dropped 1 percent. The VIX declined 1 percent as risk positioning adjusted.
Warsh reiterated his opposition to forward guidance, calling for a "quieter Fed" that does not serve as a trading signal for markets. "The Fed should not indulge a regime in which market participants are looking primarily to the Fed for their next trade," he said.
Some analysts now assess that Warsh has effectively locked in a September move. Any pause would raise credibility questions, said Steve Blitz, chief U.S. economist at TS Lombard. A hike also invites political friction with President Donald Trump, who has consistently pushed for lower rates.
