Warsh's Jackson Hole Debut Pushed September Hike Odds Up More Than 20 Points
Everyone assumed Trump had installed a rate cutter. That was the whole point of Kevin Warsh.
Trump nominated Warsh to chair the Federal Reserve on January 30, after years of publicly attacking Jerome Powell for not cutting rates fast enough. Warsh had made the case that AI-driven productivity gains could support growth without stoking inflation, an argument that fit neatly with what Trump wanted to hear. His confirmation was the narrowest in the history of the job: the Senate voted 54 to 45 on May 13, and Warsh was sworn in on May 22, taking over from Powell.
A speech that didn’t go the way Trump wanted
Warsh delivered his first major address as chairman at Jackson Hole on August 28, marking his hundredth day in the job. What came out of it cut against the script Trump had in mind. Warsh conceded that this summer’s PCE and CPI prints came in better than expected, but he was blunt that the underlying trend has not meaningfully improved.
He backed that up with real-economy data. Capital expenditures have grown 9% over the past four quarters, he said, with more than half of that increase traceable to AI infrastructure buildout. Real consumer spending is still up more than 2% over the same period despite tariffs and an oil price shock, and S&P 500 profit margins remain elevated by historical standards. The picture he painted was of an economy that hasn’t cooled, paired with inflation progress that has stalled.
Hike odds: 35% to 56% in half a day
The market read that combination as hawkish. CME FedWatch pricing for a rate hike at the September 15-16 FOMC meeting stood in the mid-30s the day before the speech, jumped to roughly 46% intraday right after Warsh spoke, and climbed as high as 56% by the afternoon. The 2-year Treasury yield rose 6.6 to 8 basis points intraday to 4.29-4.31%, a one-month high, while the 10-year sat around 4.67-4.7% and the dollar index gained 0.4% to roughly 99.5. Notably, the Nasdaq and S&P 500 also rose 0.4% to 0.6% over the same window. Stocks climbing alongside hike odds is the tell: traders read the higher rate path as a byproduct of strength, not a response to weakness.
It’s too early to call this a full hawkish pivot. Warsh still didn’t offer explicit guidance or spell out a reaction function. Navy Federal’s chief economist argued a hike is unlikely to land as soon as September, penciling in October or December instead, and some market participants dismissed the speech as more of the same Warsh-speak with little substance behind it. A 20-point jump in hike odds inside half a trading day can just as easily be an overreaction that unwinds if the next data don’t back it up.
There’s also a political layer here. Trump has kept up direct contact with Warsh since he took office, breaking with the tradition of routing that contact through the Treasury secretary, and his administration is still pursuing the effort to remove Fed Governor Lisa Cook. A chairman he installed to cut rates now leaving the door open to a hike is not the combination the White House wanted.
Treasury adds another wrinkle. Secretary Scott Bessent announced last week that long-dated Treasury buybacks will at least double, from $2 billion to at least $4 billion per operation, starting September 9. That’s fiscal policy leaning on yields in one direction while the Fed chair leaves room to push the other way. The Treasury and the Fed are pulling on the same bond market from opposite ends.
September 4, 11, and 16
The speech itself isn’t the thing to watch anymore. It’s what comes next. The August jobs report lands September 4, and August CPI follows on September 11, the two remaining data points before the FOMC meets. Strong prints on both would keep a September hike a live option. A visibly softer jobs number would leave Friday’s hawkish tone looking more like rhetoric than a real shift.
The refusal to give forward guidance turned out to be its own kind of signal, just one the market had to write for itself. Anyone holding rate-sensitive fixed income or duration should treat the September FOMC as three checkpoints, not one event, and plan around September 4, 11, and 16 accordingly.
Not investment advice. This is not a recommendation to buy or sell any security.
Disclaimer — This article is for general informational purposes only and is not a recommendation to invest in any specific security or product. Investment decisions and their consequences are solely the reader's responsibility.
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