Jackson Hole analyst summary: Fed’s Warsh sounds more hawkish

Federal Reserve Chairman Kevin Warsh’s unexpectedly hawkish stance in his speech at the Jackson Hole meeting raised market expectations for a rate hike next month.

Gold fell on Monday, and Asian stocks also fell. Federal funds futures traders see a 60.4% chance of a 15 percentage point hike in September, up from about 56% on Friday, according to CME’s FedWatch tool.

Market participants said the following about Mr. Warsh’s speech:

“Chairman Warsh’s Jackson Hole speech surprised us with its specificity on the economy and outlook, as well as its clear hawkish leanings,” Deutsche Bank said. The firm continues to expect the Fed to raise interest rates by 50 basis points this year, with rate hikes at the Federal Open Market Committee meetings in September and December.

“The emphasis on inflation risks, combined with Mr. Warsh’s clear commitment to achieving price stability and reluctance to pre-commit to future policy action, reinforces the heightened risk of policy tightening this year, although it could be talk without action,” UOB said in a note.

“The index is highly sensitive to short-term inflation statistics,” Nomura said in a note. “Mr. Warsh made hawkish remarks at the Jackson Hole economic symposium, emphasizing the importance of inflation targeting and suggesting that policy may need to respond if inflation does not resolve rapidly.”

James Oye, market strategist at Tiger Brokers, said Warsh’s assessment of strong U.S. economic conditions “is seen as reducing the likelihood of a rate cut in the near term.” His “emphasis on the 2% inflation target could be interpreted as an effort to reassure markets that monetary policy will not bow to fiscal pressures and to strengthen the Fed’s independence and credibility.”

However, Matthew J. Maley, chief market strategist at Miller Tabak & Co., believes there is still “no empirical basis for raising rates.”

“Mr. Warsh seems to be talking about inflation to claim credit for controlling inflation when aggregate policy inevitably goes down,” Maley said, adding that since the last FOMC meeting, inflation data has been better than expected, but labor market data has been weak.

Gabekal Research said in a note that Warsh’s reiteration that short-term interest rates should remain the primary tool of monetary policy suggests he will continue to shorten the average duration of the Fed’s balance sheet.

“This appears to be creating a conflict between the Fed and the U.S. Treasury, which announced in early August that it would ramp up buybacks of long-term government bonds in an effort to prevent further increases in long-term interest rates,” Gabekar added.

“Warsh has promised to bring inflation back to the 2% target and signaled that interest rates could rise further, strengthening the dollar and reversing some of the ground decline that pushed gold up about 14% in August, the biggest monthly gain this century,” Susquehanna said.

—CNBC’s Joanna Ossinger contributed to this report.