Warsh shift points to an ‘insurance’ Fed hike
Recent commentary from Kevin Warsh at the Jackson Hole Symposium indicates a significant shift in the Federal Reserve's policy posture, moving from a patient rate-holding strategy to a more hawkish stance where a rate hike appears more likely. Per the full note , the Fed, driven by persistent inflationary pressures, now prioritizes a preemptive hike to ensure inflation returns to target, which fundamentally alters the analysis surrounding the September decision. The new stance suggests that unless the upcoming labor and inflation data are exceedingly weak, a hike is now the default expectation. Notably, the September 4 jobs report and the September 11 CPI print will be critical data points under this new framework.
What the desk is arguing
The shift articulated by Warsh frames an expectation that the Federal Reserve is likely to raise rates unless there is compelling evidence to pause. After the Jackson Hole Symposium, the desk notes that the Fed's conditionality for hiking has dramatically evolved — reflecting a tightening bias amidst ongoing inflation above target levels for 65 months. This marks a notable departure from previous assumptions of sustained patience in monetary policy.
The Fed's current positioning suggests that only an exceptionally unfavorable jobs report or a significantly lower-than-expected CPI might forestall a rate hike. Previously, data supporting a hike was pegged at 75k+ non-farm payrolls; post-symposium expectations indicate hikes might be anticipated even with numbers significantly lower — a major adjustment in outlook highlighting the Fed’s readiness to act against inflation.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, with a range between 1.04 and 1.12. Notably, firms such as jpmorgan estimate a target of 1.10 for March 2026, while bofa believes a more conservative approach is warranted, issuing a forecast of 1.04 for the same period.
This more aggressive Fed outlook post-Jackson Hole contrasts with the more dovish views held by some market participants, particularly with bofa aligning with a more cautious stance compared to jpmorgan. The positioning reflects a divergence, with the desk's outlook leaning towards hawkish expectations.
How other firms see it
The current sentiment has resulted in a split among analyst projections, with firms like jpmorgan and others foreseeing rate hikes as more probable, indicating alignment on the hawkish approach from Warsh's commentary. Conversely, firms such as bofa maintain a bearish view, suggesting the potential for policy pausing amidst economic uncertainties.
As the market digests these perspectives, analysts should keep an eye on the USD/EUR pair, as it is expected to react to any shifts in Fed policy outlook alongside inflation metrics and employment data leading up to the crucial September decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Warsh signals a hawkish pivot for the Fed, indicating a likely shift to a rate hike stance.
- 02Expectations for the September Fed meeting have changed, with a hike anticipated barring extremely weak data.
- 03The upcoming jobs and inflation data will be pivotal in determining the Fed's next steps.
- 04A growing divergence exists among market participants regarding future rate hikes reflecting varied economic outlooks.
Market implications
With the Fed's altered stance, market participants should closely monitor the upcoming September jobs and CPI reports for signals that could validate the desk's hawkish outlook. A critical marker of sentiment in the USD/EUR may emerge as rates are recalibrated based on new inflationary data.
Risks to this view
A significant deviation in the September labor or inflation data which shows steep declines in employment growth or core inflation below key thresholds would lead to a reassessment of rate hike probabilities, potentially reversing the current bullish positioning.
Articles Warsh shift points to an ‘insurance’ Fed hike Published 11:40 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Kevin Warsh's Jackson Hole speech has shifted the Federal Reserve's position from hold unless you have to hike, to hike unless you can justify a hold. While our macro projections suggest the Fed can afford to be patient, the shift in stance indicates an appetite for a hike to help ensure inflation returns to target. We see no need for a series of hikes James Knightley Kevin Warsh's Jackson Hole speech has shifted expectations, making a September rate hike more likely than a pause as the Fed seeks to reinforce its inflation-fighting credentials Chair Warsh signals a September hike is more likely than not Ahead of the Federal Reserve’s Jackson Hole Symposium, we were comfortable with the view that the Fed would be patient and hold rates steady well into 2027.
However, Chair Warsh took a notably more hawkish stance in his keynote address. He emphasised a focus on inflation, which has been above target for 65 consecutive months, and a sense that financial conditions aren’t tight in an environment of full employment. Given this, we need to change the way we think about the September Fed decision.
Previously, it was that the Fed would hold unless the data justifies a hike. Now it is that the Fed will hike, unless the data justifies a pause. The shift is subtle, but significant.
There are two key August data points ahead of that decision; the 4 September jobs report and the 11 September CPI print. Before Jackson Hole, we would have said it requires a non-farm payrolls figure of 75k+, the unemployment rate holding at 4.1% with core CPI coming in at 0.3% month-on-month or above to result in a vote in favour of a rate hike. Now, we suspect it will likely require a jobs figure below 25k, possibly even net job losses, with a core CPI MoM reading below 0.2% MoM, to prevent/delay a hike.
While maintaining a forecast of a stable Fed funds rate through to 2027 could be justified based on our growth, inflation and jobs forecasts, the shift in stance needs to be taken on board. After having sounded hawkish in June and then backtracked in July, what would it mean to Warsh’s credibility to have gone hawkish again in August only to turn more dovish in September? His emphasis on trends rather than individual data points also suggests he has made his mind up and, with no-one on the FOMC openly hostile to a rate hike, we have to say that a 25bp increase now looks more likely than a hold.
With Treasury Secretary Scott Bessent watching nervously as longer-dated yields climb, he too is likely to be on board. Even President Trump has seemingly given him a pass, saying "he'll do what he has to do". Although our macro projections suggest the Fed has the room to wait Regarding the macro backdrop, the economy continues to look robust with high-income consumer spending and tech investment the key activity drivers amidst tepid job creation and weak consumer sentiment.
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