Warsh's Hawkish Tone: Fed's July 25 Expectations and Dollar's Rise

Federal Reserve Chair Kevin Warsh's unexpectedly hawkish tone in his Jackson Hole speech sent shockwaves through markets, boosting expectations of a 25 basis point hike in September to 60.4%. Goldman Sachs predicts the Fed could hike by 50 bps this year. Warsh's emphasis on the 2% inflation target has strengthened the dollar and caused gold to drop 14%. However, Nomura warns that 'policy tightening could occur if inflation data does not decline rapidly,' while Miller Tabak's Matthew J. Maley suggests Warsh may be 'inflating inflation to claim credit for taming it later.' Gavekal notes that Warsh's commitment to shortening the Fed's balance sheet duration may clash with Treasury's efforts to buy long-term bonds.