After Warsh's "Jackson Hole" presentation, will the Fed have no choice but to raise rates in September?

Following Federal Reserve Chairman Warsh's hawkish debut at the Jackson Hole Economic Symposium, the market quickly priced in expectations of a September rate hike by the Fed.

Warsh stated unequivocally on Friday that the 2% inflation target remains "unwavering," current financial conditions are "not restrictive," and recent better-than-expected PCE and CPI data are insufficient to demonstrate a "meaningful improvement" in the underlying inflation trend. He provided a clear threshold for action—if the Fed cannot be certain that inflation is falling at a "clear and sufficiently rapid" pace, it "still has work to do."

The market quickly priced in the interest rate hike. The two-year Treasury yield jumped 12 basis points to 4.35% , the largest single-day increase since the first press conference in June and the biggest fluctuation during Jackson Hole since 2010; the dollar strengthened and gold fell.

Federal funds futures indicate that the probability of a September rate hike has risen from about 35% before the speech to over 50% , meaning that at least one rate hike this year is almost fully priced in. Barclays and Société Générale adjusted their forecasts that day, expecting rate hikes of 25 basis points each in September and December.

Hawkish revision: The "communication incident" in July has been followed up.

Wall Street generally interprets this speech as a hawkish "correction" to the communication following the July FOMC meeting.

At its July meeting, the Federal Reserve kept interest rates unchanged, but the decision was not unanimous—according to the minutes, several officials favored raising rates, while others indicated that tightening policy would be necessary if inflation did not decline. More problematic was Warsh's questioning of the Fed's preferred inflation gauge as still the "right target" at the post-meeting press conference, shaking market confidence in its price stability commitment. Long-term yields jumped, with the 30-year yield briefly hitting its highest level since 2007. Subsequently, Treasury Secretary Bessant made the unusual announcement of expanding the bond repurchase program to stabilize yields, which only exacerbated market concerns that Washington was attempting to "artificially suppress long-term interest rates."

Priya Misra of JPMorgan Asset Management stated that the Jackson Hole speech was a powerful response to the "communication blunder" in July, which she called a "closing-off correction."

Warsh did several key things this time: he reiterated that the 2% target is "firm and fixed," anchored to the PCE price index , thus dispelling concerns raised in July that the target might be revised; he acknowledged that inflation has been above target for 65 consecutive months, and that "the responsibility lies entirely with the central bank"; he clarified that interest rates are the Fed's "primary tool," and that unconventional policies should be used cautiously; and for the first time, he stated that current financial conditions are not restrictive —the credit and lending markets show almost no signs of policy constraints. In other words, interest rates are not high enough.

Catramone, head of fixed income at DWS Americas, commented that Warsh's remarks were "completely the forward guidance the market was expecting at the July meeting," a "180-degree turn." Bank of England Governor Bailey said it "had real substance," while former Cleveland Fed President Mester stated, " It's time for those advocating for holding off to give a convincing reason. "

However, Warsh maintained his consistent style—refusing forward guidance. He didn't explicitly support a September rate hike, but instead systematically defended the "no commitment" approach: forward guidance in normal times could mislead the market, and the Fed should focus on "discipline, not a single decision." Peter Andersen, founder of Andersen Capital, quipped: investors wanted GPS, but Warsh only provided a compass.

Wall Street bets shift

Following the speech, the two-year yield rose sharply, while the 30-year yield remained almost unchanged— the yield curve flattened, exhibiting typical characteristics of a rate hike trade . The recent further rise in short-term pricing suggests another underlying judgment at the long end: if the Fed does take action, long-term inflation may actually be manageable.

Institutional investors have also become clearer. Barclays, which had predicted in mid-June that interest rates would remain unchanged indefinitely, has now changed its forecast to expect rate hikes of 25 basis points each in September and December , raising the target range for the federal funds rate to 4.00%–4.25%. Societe Generale gave the same forecast, and additionally expects another hike in March next year, but stated that "there is considerable uncertainty." Natixis's chief U.S. economist, Hodge, believes that the market had previously underestimated the possibility of rate hikes, and that current pricing is "more reasonable."

However, there are also dissenting voices in the market.

Wolfe Research chief economist Stephanie Roth pointed out that the speech itself provided ample justification for a September rate hike, but considering Warsh's relationship with the White House—with the November midterm elections approaching and Trump repeatedly criticizing his predecessor for not cutting rates fast enough—she set the probability at "slightly below 50%." Moneycorp's Epstein commented, "Warsh said a lot, but it didn't seem to have much substance." He cautioned that Warsh had previously released hawkish signals multiple times, but policy actions hadn't followed suit, and the market might again fall into a reversal of "hawkish expectations rising—actual inaction." MUFG's head of strategy, Goncalves, similarly warned, "If the rhetoric is hawkish but subsequent meetings continue to skip tightening, it's just repeating old arguments."

September's suspense: Data is the threshold, reputation is the gamble.

Jackson Hole's hawkish speech was both a fix and a constraint for Walsh.

Aberdeen’s Chief Investment Officer, Amis, laid out the logic: “If they don’t raise rates in September, their credibility will suffer another blow.” Warsh has already told the market that underlying inflation must fall quickly enough, otherwise “there is still work to be done”—if the data does not improve and rates remain unchanged in September, the market will question the policy substance of the hawkish statements.

The key variable hinges on the August CPI, to be released on September 11. Bloomberg analysis suggests that a downside surprise would cool calls for an interest rate hike, while an upside surprise would almost certainly secure one. Currently, the PCE year-on-year growth rate is 3.7%, and the annualized six-month rate is 4.1%, still quite far from the 2% target.

The broader context is also shrinking the Federal Reserve's policy space: the federal government's nearly $2 trillion annual deficit, coupled with the AI investment boom squeezing the bond market's absorption capacity, and the energy prices driven up by the Iran war continuing to put pressure on inflation. These factors cannot be directly resolved by monetary policy, but they are indeed raising long-term interest rates. Wells Fargo global strategist Schlossberg predicts that even if the Fed doesn't act in September, it will likely take action this year—"unless inflation falls significantly, which I don't expect to happen."

Timiraos, the "new Fed mouthpiece," summarizes the situation as follows: The Fed may not be finished battling inflation. The current consensus on Wall Street is that Warsh has completed his hawkish revision of his July communications, significantly increasing the probability of a September rate hike, but the final decision still rests with the data. Warsh's real test has shifted from "whether the market understood his speech" to a more pressing question: if the data doesn't cooperate, is he willing to translate his hawkish diagnosis into an actual rate hike?

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.