Warsh Speaks, September Hike Looming
The much-awaited Warsh speech at the Jackson Hole Symposium provided markets with greater clarity, but not many answers. Chair Warsh delivered a hawkish assessment of the economy and offered a clearer indication of the Fed’s reaction function.
Warsh stressed that short term interest rates should remain the primary tool for delivering the Fed’s dual mandate and made clear that policymakers must be prepared to act, as the inflation trend is not improving.
Markets welcomed the greater clarity: front end Treasury yields repriced around 8bps higher, while the dollar and the long end of the curve found some relief. With a September hike now priced at around 60%, it would probably take a meaningful deterioration in the labour market or a surprisingly benign inflation print to prevent rates from moving higher at the next meeting.
Escalation Risks Back Into Focus
A surprise visit by CIA Director Ratcliffe to Moscow last week has brought the risk of a broader escalation from Russia back into focus. According to press reports, Ratcliffe travelled to Russia partly to warn Moscow against any attempt to test NATO’s unity, following U.S. intelligence assessments that the Kremlin could consider a limited action against a NATO member, potentially in the Baltics. The visit should not, however, be read as evidence that such an attack is imminent.
The economic backdrop is becoming increasingly difficult for Moscow, raising the incentive for Russia to increase pressure rather than move quickly towards a negotiation. The most likely path remains an intensification of strikes against Ukrainian energy and other critical infrastructure, alongside continued military pressure on the battlefield.
At the more extreme end of the distribution, Moscow could also seek to test NATO’s cohesion through hybrid operations or limited provocations, particularly at a time when Western air defence and interceptor inventories have reportedly come under increasing strain from simultaneous demands in Ukraine and the Middle East.
Algebris Investments’ Global Credit Team
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