The CME Group’s FedWatch tool showed probabilities for a move at the Sept. 15-16 meeting nearly doubling after Warsh’s Friday remarks, reversing earlier expectations that placed the next increase no sooner than December. The sharp swing underscores how sensitive traders remain to the Fed chair’s tone on inflation.
Warsh Raises the Bar for Standing Pat
Warsh acknowledged that recent inflation readings have softened but said the progress “does not tell me that underlying trends have meaningfully improved.” He told the Jackson Hole symposium the Fed “must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” adding, “otherwise, we have work to do.”
Bank of America economist Aditya Bhave said the speech signaled “a more credible Fed” and argued Warsh has raised the threshold for inaction by urging focus on trends rather than isolated data points. “Absent a material downside surprise, the onus is now on Warsh to deliver a hike,” Bhave wrote in a note. “Otherwise, he risks undermining some of the credibility he gained on Friday.”
BofA is holding to its call for three rate increases ahead.
Skeptics Push Back on Hike Narrative
Treasury Secretary Scott Bessent pushed back against the hawkish reading, telling CNBC from the G20 summit in Asheville that the economy is absorbing a supply shock and that core inflation “has remained very, very restrained.” He cautioned that central banks traditionally avoid raising into supply shocks unless second- or third-order effects emerge.
Citigroup economist Andrew Hollenhorst called Warsh’s comments “relatively uncontroversial and have been restated by Warsh each time he has spoken.” He characterized the tone as only “marginally” more hawkish and noted that current data shows no urgent need for tighter policy. “At the July FOMC meeting there was not a consensus to raise rates,” Hollenhorst wrote. “Data since that time have shown cooler inflation and softer hiring. There will not be a consensus to hike rates in September.”
JPMorgan Asset Management chief global strategist David Kelly added that the labor market gives little cause for alarm. “The economy doesn’t have quite as much momentum as Kevin Warsh suggested,” Kelly wrote, adding that “markets may have been premature in now assigning a 60% probability to a September rate hike.”
Data Gauntlet Before the September Decision
The Fed will navigate a heavy data calendar before its next meeting. This week brings key employment reports against a backdrop of three consecutive weak nonfarm payrolls prints. The following week delivers both the consumer and producer price indexes, which feed directly into the Fed’s preferred inflation gauge, the personal consumption expenditures price index.
Additional releases include several housing reports and retail sales figures landing the same day as the rate decision. The July PCE reading showed headline inflation at 3.7% with core at 3.3%, while the Dallas Fed’s trimmed-mean measure held at 2.3% — far closer to the central bank’s 2% target.
What Happens Next
The September FOMC meeting will hinge on whether upcoming jobs and inflation data corroborate Warsh’s concern about underlying trends or reinforce the skeptics’ case for patience. Three of 12 FOMC voters already backed a hike in July, giving the hawkish camp a base to build on if data disappoints. Conversely, softer CPI or another weak payrolls print could unwind the post-Jackson Hole repricing rapidly. Investors should watch the CPI release and August jobs report as the decisive inputs: if both come in cool, the 66% hike probability looks vulnerable; if either surprises hot, Warsh’s credibility test becomes a policy action.
— Hiro Tanaka, markets desk, AXO News