Following Kevin Warsh’s ostensibly hawkish address in Jackson Hole, I wrote that if the market-implied odds of a rate hike from the Fed were “meaningfully above 50% on the eve of September’s FOMC gathering, Warsh will have a choice to make: Hike ahead of the mid-terms or face a market revolt.”
As Bloomberg Intelligence’s Ira Jersey put it late last month, Warsh “back[ed] himself into a corner” with his Wyoming speech. No, he didn’t precommit to a hike in the event the data argued the hawkish case, precommitments being akin to the forward guidance Warsh swore off. But he did double down on the price stability message from his debut press conference in June.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh told the crowd gathered in the Grand Tetons last month. “Otherwise, we have work to do. That’s our job, our mandate and our charge to keep.”
Price data received since Warsh uttered those words doesn’t “clearly” suggest inflation’s moving to the Fed’s objective, and certainly not “at sufficient speed.” Core CPI ran 0.3% in August, according to September 11’s release from the BLS, more than double the pace consistent with a 2% annual rate, and so-called “supercore” inflation (core services price growth excluding the housing metrics) was 0.5%, the warmest since January.
A day earlier, the BLS’s PPI release tipped some upside versus consensus for the Fed’s preferred measure of price growth, PCE inflation, due later this month. The message from the report on factory gate prices was amplified by Brent, which stormed sharply higher, nearly reaching $110, as the Houthis seized key territory in Yemen.
All of that on the heels of a jobs report which suggested the US labor market’s suddenly in fine fettle again.
The market-implied odds of a hike from the Fed this week are roughly 90%. Two-year US yields rose more than 25bps last week, the most since the volatility around “Liberation Day.”
As the figure above shows, twos are now 100bps — a full percentage point — wide to EFFR.
Warsh must hike. If he doesn’t, he’ll raise fresh, and this time urgent, questions about the Fed’s credibility and independence. In terms of price action, a hold would trigger a dramatic bullish reversal at the front-end and, quite possibly, a runaway bear move at the long-end, with the latter being at odds with Scott Bessent’s efforts to arrest the increase in long-term US yields.
The already challenging optics of a hold on the heels of a barnburner jobs report, warm inflation and a return to triple-digit crude, would be made worse by what’d almost surely be the same hawkish dissents Warsh faced in July. And he’d be asked in the press conference if his decision not to support a hike was in any way related to public calls for rate cuts by both Donald Trump and JD Vance.
So, again, Warsh better hike. Assuming he does, questions will turn to how many hikes the Fed intends to deliver in the months (or quarters) ahead. On that point, the 2026 dot in the SEP refresh will be watched closely.
The figure above, from BMO’s Ian Lyngen and Vail Hartman, is worth a look. It shows market pricing for the terminal rate — the Fed’s “destination,” if you like.
“As it currently stands, futures [are] pricing in a terminal policy rate of 4.54%, an impressive increase from before Jackson Hole,” Lyngen and Hartman remarked. “In other words, the market is expecting roughly 90bps of policy tightening, or three- to four quarter-point rate hikes, over the next several quarters.”
They went on to say that if past is precedent, it’s very unlikely that a hike this month would be a “one and done” affair. “Historically, the Fed has rarely been content with a single 25bps move in either direction [so] we’re operating under the assumption that, at a minimum, the Committee will ultimately deliver 75bps of hikes in the form of three quarter-point moves spread out over a series of meetings.”
I understand the logic — and the Fed could always skip October out of “respect” for the mid-terms — but I frankly don’t see how a series of hikes is a politically tenable proposition for Warsh. If your answer is, “Well, the Fed’s not beholden to politics,” I’d gently suggest you’re begging the question.
I bet Warsh won’t go against Trump and raise rates. I just don’t think he has the spine to do it. But I hope I’m wrong.
Why not go against the big T on rates? What’s he going to do? He can’t fire the guy and there’s no one he can effectively threaten. If I were Warsh I’d have a fresh copy of my resignation in my pocket with an open date. If Trump wants threaten the Chair call his bluff. This back and forth will get very old very fast. There just aren’t any good options for Trump at this point. The markets will eat him and his kin alive if he persists in his stupidity. Warsh can find a new job that pays better instantly.
Trump continues to push for lower rates, based upon his rationale that “America’s credit strength justifies substantially lower borrowing costs regardless of the Fed’s formulas”.
He isn’t wrong, but that isn’t the Federal Reserve’s mandate.
The US can pay whatever interest rate it wants. It’s not about credit strength, and if Trump has taught us anything, no part of the government, including the Fed, is actually independent.
What Trump doesn’t understand is how unpopular inflation is. Ironically, I think it’s possible we are underestimating the possibility that higher rates may have an inflationary effect, but either way, taming inflation would be much more quickly accomplished via tax policy than monetary policy. Since that’ll never happen, we’ll just have to wait until the next recession to get inflation under control.
I don’t think that’s what the rate push is about. More than once Trump has averred that the US is the “best” country in the world so it must have the lowest rates. It’s a status thing.
The question has been begged from a crowd that usually sees others doing the begging. There is a chinese proverb which I loosely quote. ‘May you not have the curse of living in interesting times.’
They’ll vote for an interest rate increase, but Warsh will dissent. He will justify his vote because of the task forces, short term supply shock, AI future productivity and its the Trump Economy for God’s sake!
Should be a very interesting meeting and a better show afterwards….enjoy
Little Kevin is in a lose-lose situation. Hold and lose twice (the House on the long end and Fed credibility). Raise and the golf game is questioned, housing records get a close look and it is hard to say it is consequential, other than the temporary reprieve on “credibility,” whatever that means at this point.
Maybe the long end takes a break on the 2nd choice.
At least we will get some more of Baron’s and Natalie’s commentary this week. That should improve our general sense of wellbeing.
It’s interesting to see the AI leaders asking to pump the brakes on AI development this weekend. If I were a conspiracy theorist, I might wonder if they are trying to rein in the stock market a bit to give the Fed an excuse to keep rates unchanged. After all, they do have a vested interest in lower rates to keep the AI buildout party going.
Buckle up, folks! I think we’re in for an interesting week.
If I were a different kind of conspiracy theorist, I’d say something potentially very dangerous happened this weekend and we might want to be mindful of a left tail shock related to AI doing something naughty.
Wouldn’t there be more than 3 hawkish dissents this time, even if there weren’t enough to outvote Warsh? As I understand it, he would have to lose 4 more votes to be outvoted, as it takes a majority to change policy.
Will be fascinating to see where Powell and Cook come down if Warsh votes to keep rates unchanged. Also, it’s been something like 320 meetings since the chair and the NY president have been on opposite sides, so how that plays out will be very interesting too…
When was the last time a Fed meeting was “must see T.V.?” It sounds like it will be kabuki theater no matter what the decision is. Trump must be communicating with Warsh on some level trying to coordinate things. If the Fed is serious about getting inflation under control they should open with a 50 basis point hike. 25 basis points may buy some time, but certainly would not be enough to turn the tide, and would thus necessitate further cuts. If the Fed does commit to multiple rate hikes it would likely be an “escalator” (a small hike, skip-a-meeting, small hike, skip-a-meeting, etc.) and not “stairs” (a small hike at every single meeting). If Warsh does raise rates, and has not coordinated the move with Trump, we could have a replay of late 2018 when Trump first publicly lashed-out at Powell for the market turmoil that followed his “long way from neutral” comment.
Where things really get interesting is if Warsh doesn’t hike. He would have to lean on oil prices being transient somehow, and then simply look past everyone in a brief statement without answering many questions. I think markets would explode (much like “Liberation Day”), as we would then know what Warsh’s marching orders really are. Impossible? Yes, but Trump doesn’t seem to mind blowing things up long before admitting he was wrong about something.
So ironic that the lower rates (i.e., 10-year) Frump wants are on the other side of higher overnight rates. The man left everything a disaster after the first term and he’ll leave everything a disaster after the second one too. That should get rates down.
“ Trump says he will cut off all trade entirely with “some nations” unless the Fed lowers interest rates”
How does Warsh deal with this ?