Fed funds futures traders are now pricing in 57% odds of a hike at the Fed's September 15 to 16 meeting, up from 35% before Warsh's comments.
A key development on Friday was Warsh's clarification that he is focused on Personal Consumption Expenditures for the Fed's inflation target, according to a report from analysts at Bank of America.
"Warsh clarified that he is focused on delivering 2% PCE inflation. This stands in contrast to his comments at the July presser, which seemed to muddy the waters on his preferred inflation measure," they said.
Yields and curve move higher
Five task forces reviewing the Fed's operational and monetary frameworks have been established by Warsh, including one examining the data the central bank uses in its decision-making.
He has indicated a preference for alternative inflation measures that may show more moderate price pressures than the PCE data the Fed has traditionally relied on.
The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 11.97 basis points to 4.352%, the highest since July 24. It is heading for its largest one-day increase since March.
The yield on benchmark U.S. 10-year notes US10YT=RR rose 5.6 basis points to 4.728%, a one-week high.
The yield curve between 2- and 10-year notes US2US10=TWEB reached 36.4 basis points, the flattest level since July 29.
Data may guide the next Fed move
A September interest rate hike may now depend on jobs and consumer price inflation data for August, which are both due before the Fed meeting.
“It puts the emphasis on the data that's coming up now, so if we get a stable or stronger labor market signal next week and then we get a stronger inflation print the following, then that's going to give a signal that maybe Warsh is ready to go as well,” Brooks said.
Separately, data on Friday showed that the U.S. economy likely created 79,000 fewer jobs in the 12 months through March than previously estimated.
Treasury yields jump after Warsh remarks
U.S. Treasury yields jumped and interest rate sensitive two-year yields reached a more than one-month high after Federal Reserve Chairman Kevin Warsh said the central bank would "have work to do" if policymakers were not confident inflation was returning to its 2% target, fueling bets on a September rate hike.
The comments, made at the Fed’s annual Jackson Hole symposium, acknowledged that financial conditions do not appear restrictive and were Warsh's clearest indication yet that further rate hikes may be needed to curb inflation.
“Markets took it a bit hawkishly. We saw the market price in more hikes,” said Molly Brooks, a U.S. rates strategist at TD Securities.
TLT•
