Report: Warsh Ready to Raise Rates in September if Inflation Data Remains Strong in Coming Weeks

According to a Thursday report by the UK's Financial Times, if inflation data in the coming weeks runs hot and market expectations for rate hikes intensify, Fed Chair Warsh is prepared to raise rates at the September rate decision.

Affected by this news, yields on US short-term Treasury bonds rose. Despite the massive sell-off in US Treasuries following last week's monetary policy meeting, Warsh remains steadfast in implementing his streamlined communication strategy.

The report cited sources familiar with Warsh's thinking as saying that he acknowledges missteps in communication since assuming the role of Fed Chair, including failing to sufficiently reinforce the core message regarding price stability and causing market confusion over whether long-term reform plans would impact near-term monetary policy. However, these sources insisted that these missteps are not sufficient to overturn the overall direction of reforms.

Following last week's Fed meeting, yields on US long-term Treasury bonds surged sharply, with the 30-year Treasury yield briefly reaching its highest level since 2007. Investors generally believe that Warsh's limited information disclosure has weakened his credibility in curbing inflation, while inflationary pressures triggered by Trump's war against Iran have further exacerbated market uncertainty regarding the interest rate outlook.

Adhering to Streamlined Communication, Not Yielding to Market Pressure

Since assuming the role of Fed Chair in May this year, Warsh's most significant policy shift has been the substantial reduction of forward guidance to the market. His predecessors—Powell, Yellen, and Bernanke—all dedicated themselves to providing detailed economic outlooks and policy signals to the market, whereas Warsh has taken the opposite approach.

Since leaving the Fed in 2011, Warsh has repeatedly publicly criticized "forward guidance," arguing that this practice trapped successive chairs in their own words and led to excessive policy commitments.

He believes that a more streamlined communication strategy will allow officials to more clearly read the market's true assessment of economic health, thereby reducing policy errors.

Warsh has publicly stated that the "trigger pullers" who actually make investment decisions in the bond market understand his approach, and that criticism mainly comes from "people who have no investment responsibility and can only succeed when everything is carefully choreographed."

Eric Wallerstein, advisor to Stephen Miran, Chief Macro Strategist at Clocktower Group and a former Fed Governor, stated, "I don't understand where the negative sentiment towards Warsh in the market is coming from."

Probability of September Rate Hike Rises to 55%, Interest Rates Remain the Primary Tool

According to data from CME Group, futures markets currently estimate the probability of a 25 basis point rate hike at the September meeting at approximately 55%.

Insiders stated that although Warsh has raised the possibility of shrinking the Fed's $6.7 trillion Balance Sheet to tighten monetary policy, interest rates remain the primary tool and will be utilized in subsequent meetings if necessary.

The Fed's preferred inflation indicator recorded 3.7% in June, deviating from the 2% target for more than five consecutive years. The market's benchmark inflation expectation indicator—inflation swap data—shows that investors expect average annual inflation to be around 2.4% over the next five years (starting five years from now). This figure has declined slightly in recent days, which insiders believe indicates that the market still trusts the Fed's commitment to achieving price stability targets.

Torsten Sløk, Chief Economist at Apollo Global Management, stated that Warsh was treated unfairly last week, "There is a growing consensus in the market that forward guidance is not a good idea, as it leaves too little flexibility for central banks." However, he also pointed out that Warsh could do more in explaining his plan to reduce inflation.

Jackson Hole Speech May Become a Key Node

Insiders stated that any major reform of the monetary policy formulation process will be delayed until at least next year, when the working groups established by Warsh at his first press conference in June will submit reports to the Federal Open Market Committee.

Warsh is expected to deliver his first speech at the Jackson Hole annual symposium hosted by the Kansas City Fed this month. This high-profile event, closely watched by the market, is seen as an opportunity for him to elucidate the theoretical framework behind his "quiet revolution," including clarifying what he perceives as deficiencies in his messaging.

Eric Wallerstein expects, "This speech will demonstrate his posture of wanting to leave his mark. The central banking industry has gone through a difficult period with many missteps, including the Fed itself. Warsh wants to face all of this squarely and attempt to correct the course."