#WarshJacksonHolePreviewMarketsFocusOnRates

My view: The market was right to focus on clarity, but the real signal will likely be the reaction function, not a definitive September rate decision.

Important update: Warsh gave his speech on Friday, August 28th, so we can assess the signal beforehand. And he took a much clearer and more hawkish stance compared to his July statement.

My comment: Moderately hawkish, September will indeed be a volatile month.

Warsh essentially laid out three things:

* Inflation is the immediate problem. He emphasized that the Personal Consumption Expenditures Price Index remains well above the Fed's 2% target, around 3.7%, and argued that recent low readings are not enough to ensure a sustainable improvement.

* The labor market doesn't give him strong reason for easing. In his assessment, employment conditions are generally consistent with full employment, making inflation the more important side of the dual task for now.

* He effectively raised the "hold" bar. He said the Fed "will have work to do" if inflation doesn't make enough progress; Markets interpreted this as a significant indicator of the likelihood of tightening.

This is a significant shift from the uncertainty surrounding the July meeting.

The key takeaway for the markets:

I can summarize the situation as follows:

Before Jackson Hole:

"What exactly is Washington's reaction function?"

After Jackson Hole:

"Do the incoming inflation/jobs data provide a reason not to raise rates?"

This is a significant shift.

Markets have already begun pricing in a September rate hike; estimates increased significantly after the speech, and some measures positioned the probability between the mid- and upper 50%.

Therefore, I wouldn't call September a certainty. I would call it a data-dependent rate hike with a hawkish bias.

Things to watch next:

Currently, the most important data:

1. August employment/unemployment data — weak labor market data could influence the Fed's decision not to change interest rates.

2. August Personal Consumption Expenditures — Given Warsh’s emphasis on inflation, this is likely the largest variable.

3. 2-year Treasury yield — Considered the clearest real-time expression of September expectations.

4. Dollar — Consistent hawkish pricing should support the USD.

5. Nasdaq/long-term equities — Particularly vulnerable if markets move from a “long-term peak” toward a true tightening cycle.

The interesting part is the yield curve’s reaction: short-term Treasury yields rose after the speech, while long-term yields were far less enthusiastic; suggesting markets interpreted this primarily as a signal of short-term policy tightening rather than a structurally higher inflation yield.

In conclusion: I think Warsh got what the markets wanted; he replaced uncertainty with a recognizable reaction function. However, Warsh deliberately avoided making a definitive commitment regarding September. This makes the next inflation and employment data releases extremely important. If inflation remains stable while employment also stays at the same level, a rate hike in September would be the base scenario; however, if there is a significant drop in employment, Warsh may consider a wait-and-see approach.