Christopher Hodge, chief US economist, Natixis, New York:
"The market was underpricing the odds of a Fed hike before, and I think now they're appropriately priced in. This was a marked improvement from the July press conference."
"Warsh" strengthened his inflation credentials by acknowledging the problem directly, reaffirming an unambiguous 2% target and accepting institutional responsibility for the Fed’s failures. With growth solid, employment stable and financial conditions loose, his diagnosis leans clearly toward holding higher rates and potentially raising them if inflation fails to improve and not using the balance sheet to achieve this.
"What Warsh explicitly says is that inflation is too high, recent progress has been modest, labor markets are consistent with full-employment and broad financial conditions do not appear restrictive. Short-term interest rates remain the predominant policy tool, and the Fed must be ready to act if inflation does not improve."
Mark Hackett, chief market strategist, Nationwide, Philadelphia:
"Warsh accomplished what he was trying to do, which is get his point of view across without really disrupting the markets. Why the market is very modestly reacting is he is very adamant that the 2% inflation target is going to remain. There's been somewhat misguided thoughts among investors that this would soften a little bit. Clearly, that's not the case. He is reiterating the hawkishness, but in a more of a consistent way than an incremental way."
"He's telling the market, do not expect cuts in any time until we have this thing completely under control and do prepare yourself for hikes."
Gary Schlossberg, global strategist, Wells Fargo Investment Institute, San Francisco:
"What Warsh said isn't surprising given the circumstances. It came after a press conference that was criticized in retrospect. He had to come out and say something about the policy outlook, reiterating the Fed's intent to control inflation, re-enforcing the Fed's inflation-fighting credentials. The market reaction was as expected. The yield on the two-year, a very policy-sensitive portion of the curve and the shorter intermediates, did move up as they anticipated a rate increase if not in September, then in all likelihood by the early part of December."
"He threw a lot of dots out there and when you connect them, in effect, that's what he was saying. Unless inflation rolls over and we don't expect it to. If anything, the pressure may build a bit over the next 6 to 8 months. He didn't come right out and say it, but all the ingredients seem to be there at this point for at least one rate increase, if not more going forward."
Michael Rosen, managing partner and CIO, Angeles Investments, Santa Monica, California:
"Warsh acknowledged the reality of an economy at full employment and inflation above target, as it has been for five years. Nominal interest rates are below nominal GDP growth, which is the definition of a stimulative monetary policy, which is not an appropriate stance for an economy at full employment and inflation above target."
"The market raised the likelihood of an increase in the Fed funds rate at the September FOMC meeting and is now pricing in another hike by year-end. The short-end of the curve has sold off while the long-end has rallied in response to a Fed chair that sees inflation as the primary problem. Both Warsh and the market have gotten their assessments correct."
SPY•
