How Wall Street Is Thinking About Rate Hikes Following Warsh’s Speech

Federal Reserve chair Kevin Warsh reiterated his hawkish tone in his Jackson Hole speech last Friday, and investors took it to heart.

Markets are now pricing in a 66% chance that the Fed will hike interest rates at its September meeting, up from 41% a week ago.

However, Wall Street seems to be split on whether a hike is really on the way in a couple of weeks.

Here’s how forecasters at some top firms are thinking about interest rates following Warsh’s speech.

Morgan Stanley

Despite Warsh’s hawkish tone, Morgan Stanley ultimately doesn’t think the Fed will go through with a hike.

In a note on Friday, the bank said it sees inflation continuing to moderate, allowing the FOMC to keep rates where they are.

The bank also pointed to Warsh’s opening story during his Jackson Hole speech, where he reminisced on hikes he had been on in the area in the past. Warsh was alluding to two different approaches to monetary policy, Morgan Stanley said, and it’s likely he’s more in tune with style in line with that of former Fed chair Ben Bernanke, where the Fed takes a slow and measured approach to raising rates.

In September, the data should be encouraging enough to stay put, the bank said.

Here’s the excerpt from Warsh’s speech the bank flagged:

Bank of America

On the flip side, Bank of America, sees a rate hike as more likely now, and has it as its base-case scenario.

Given Warsh’s tough talk on inflation, he risks his credibility if he doesn’t hike, the bank said.

“For us, the key takeaway is that Warsh has raised the bar for standing pat by arguing that the Fed should focus on trends rather than ‘isolated data points’ and that underlying inflation hasn’t ‘meaningfully improved,'” the bank said in a client note on Monday.

BlackRock

Gargi Pal Chaudhuri, the chief investment and portfolio strategist at BlackRock’s Americas division, said there’s no doubt Warsh’s speech was hawkish.

By highlighting that inflation measures like three-month rolling super core CPI are still above 2%, he was telling investors to get used to higher rates, she told Business Insider on Monday.

Still, she’s not so sure a hike is coming at the Fed’s September meeting.

“I don’t necessarily think he was preparing us for higher rates as early as the next meeting,” she said, adding, “but I do think that this is certainly him telling us that inflation hasn’t done — even though we think it’s made some meaningful progress — it hasn’t meaningfully improved.”

JPMorgan

David Kelly, the chief global strategist at JPMorgan Asset Management, said in a client note on Monday that he doesn’t see a hike on the way, and that Warsh probably overstated the economy’s strength in his speech.

He said slowing job and wage growth would keep downward pressure on inflation, allowing the Fed to keep rates unchanged.

Kelly said that “markets may have been premature in now assigning a 60% probability to a September rate hike,” as there is “little in the labor market to suggest inflationary trouble ahead.”