The aftermath

Warsh delivered his speech. He set the bait, and the market took it. At least for now. Fed Chair Kevin Warsh’s Jackson Hole speech yesterday broke from the recent playbook of no forward guidance, and the market response was telling. Stocks climbed, but the real story was in rates: the 2-year Treasury yield jumped roughly 8bps to 4.31%, and Fed funds futures now show 57% odds of a 25bp hike in September. Warsh doubled down on inflation concerns, noting that recent readings, while better than expected, don’t yet signal a real trend shift. He explicitly pushed back on the idea that markets should look to the Fed for “their next trade,” signaling less hand-holding going forward. He explicitly said that if inflation were not to slow down soon, the Fed has a job to do. And the market decided that was enough to send a hawkish signal. Notably, gold and the VIX both dipped on the comments. A sign markets read this as removing uncertainty, not adding risk. The hard truth though, is that he can’t do much other than talking: rising rates will do a lot more damage than good, since inflation is more related to fiscal reckless and money printing than a hot economy (for instance look at the yen above 160 again, below) But the market decided that was enough, and took it at face value. Still odds for September meeting hike remain below the 70% hurdle considered by the Fed (at least the old Fed) as the minimum to not surprise the market too much. For next week, the market will absorb and distill the information, and likely readjust, one way or another.

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