Hawkish remarks by Waller push September rate hike probability to 60%, institutional interpretations summarized

Fxta.com, August 31 — Deutsche Bank continues to expect the Federal Reserve to raise rates by 50 basis points this year, with hikes likely at both the September and December meetings. According to the CME FedWatch Tool, federal funds futures traders now see a nearly 56% probability of a 25 basis point rate hike in September.

Federal Reserve Chair Kevin Warsh’s speech at the Jackson Hole annual meeting surprised the market with its hawkish tone, directly boosting expectations for a rate hike in September. Federal funds futures traders now price in a 60.4% probability for a 25 basis point rate increase in September, significantly up from last Friday.

Below are various interpretations from market watchers regarding Warsh’s remarks.

Possibility of Further Rate Hikes

Deutsche Bank stated: “Chair Warsh’s speech at Jackson Hole surprised us, both in the specificity of his comments on the economy and outlook, and in the clearly hawkish tone.” The bank continues to expect the Federal Reserve to raise rates by a total of 50 basis points this year, with one hike each at the September and December FOMC meetings.

Nomura noted in its report: “The market is highly sensitive to recent inflation data. Warsh delivered hawkish remarks at the Jackson Hole Economic Symposium, emphasizing the importance of the inflation target and suggesting that policy may need to respond if the disinflation process does not proceed quickly enough.”

Possibility of “All Talk, No Action”

UOB, on the other hand, stated in its report: “The emphasis on inflation risks, combined with Warsh’s clear commitment to achieving price stability and his reluctance to pre-commit to future policy moves, strengthens the risk of tightening policy this year, though it is also possible these are just words with no actual follow-through.”

Strengthening Independence

Tiger Brokers market strategist James Ooi noted that Warsh’s assessment of strong performance in the U.S. economy “is seen as reducing the case for a near-term rate cut.” He added: “Warsh’s emphasis on the 2% inflation target level can be interpreted as an effort to reinforce the Federal Reserve’s independence and credibility, assuring the market that monetary policy will not yield to fiscal pressures.”

Some See a Motive for Self-Congratulation

However, there are differing views. Matthew J. Maley, chief market strategist at Miller Tabak + Co, argues, “There is still no empirical basis to support rate hikes.” He stated: “Warsh seems to be exaggerating inflation so that, when overall inflation inevitably falls, he can take credit for taming it.”

He also added that since the last FOMC meeting, labor market data has remained weak while inflation data has been better than expected.

Fed vs. Treasury: Opposing Directions

Gavekal Research pointed out in its report that Warsh reiterated that short-term interest rates should continue to serve as the main tool of monetary policy, which suggests he will keep shortening the average duration of the Federal Reserve’s balance sheet. Gavekal added: “This appears to put the Fed at odds with the U.S. Treasury, which announced earlier in August an increase in long-term Treasury buybacks, clearly aiming to prevent further rises in long-end yields.”

Gold Under Pressure: Strongest Monthly Rally of the Century Reversed

Susquehanna noted: “Warsh’s commitment to bringing inflation back to the 2% target and his suggestion that rates could rise further have strengthened the dollar and partially reversed the depreciation trade that drove gold up about 15% in August — which was the strongest monthly rally for gold so far this century.”

Conclusion

A “hawkish shock” has sent lasting tremors through the market following the Jackson Hole event. The probability of a rate hike in September has climbed above 60%, the dollar has strengthened, and gold’s strongest monthly rally of this century has been abruptly cut short. Yet, market divisions remain stark: some see the Fed’s determination to defend its credibility, others see political rhetoric with no follow-through, and some worry that the policy divergence between the Fed and Treasury could intensify. In any case, every single inflation data release prior to the September FOMC meeting will act as a critical weight tipping the balance of market direction.

UTC+8 14:10, spot gold is quoted at $4,434.52 per ounce.