Kevin Warsh’s Jackson Hole Speech Could Shake Markets, Fed Rate Hike Odds Climb

Federal Reserve Chair Kevin Warsh faces one of the biggest tests of his young tenure on Friday as investors await his first Jackson Hole keynote for clues on whether stubborn inflation could force the Fed to raise interest rates again.

Warsh is scheduled to speak at 10 a.m. EDT, or 1400 GMT, at the Federal Reserve Bank of Kansas City’s annual economic policy symposium in Jackson Hole, Wyoming. The appearance comes roughly three months after he became Fed chair and at a time when markets are questioning how the central bank intends to bring inflation back to its 2% target.

The Fed has kept its benchmark rate at 3.50%-3.75% since December, but July inflation data strengthened the argument for further tightening. Headline PCE inflation stayed at 3.7% year over year in July, while core PCE held at 3.3%, leaving both measures well above the Fed’s target.

(Source: FRED)

Markets currently price in roughly a 35% probability of a rate increase at the Fed’s Sept. 16 meeting, while a hike is fully priced by December. Several policymakers have also become more vocal. 

Kansas City Fed President Jeffrey Schmid questioned whether current rates are restrictive enough and Cleveland Fed President Beth Hammack said that “now is the time to act.”

That puts added pressure on Warsh, who has largely resisted the detailed forward guidance commonly used by previous Fed chairs. Investors will instead be watching for clues about what combination of inflation, growth and labor-market data would trigger another increase.

Bond markets are particularly sensitive. The 10-year Treasury yield stood around 4.68% on Friday, while the 30-year yield traded near 5.20% after briefly exceeding 5.3% last week for the first time since 2007.

Markets received some relief elsewhere as oil prices retreated thanks to hopes of progress toward improving shipping through the Strait of Hormuz. Brent crude fell around 0.3% to $86.08 a barrel and was heading for a 5 day decline of more than 2%.

Global stocks have benefited from the oil retreat and renewed optimism around technology shares after Nvidia’s results. The MSCI all-country world index is up about 0.5% for the week. Gold was trading near $4,600 an ounce.

For markets, however, Jackson Hole is the main event. Warsh does not necessarily need to signal an imminent September hike, but any indication of what would push the Fed toward tighter policy could quickly reshape expectations across stocks, bonds, currencies and commodities.