Who exactly is Kevin Warsh? A “hawk” in dove’s clothing? Or a “dove” in hawkish plumage? Markets have been asking themselves this question since even before his appointment as Federal Reserve Chair. Nothing has changed since then. While the Fed Chair’s speech following the FOMC meeting sent the US dollar tumbling, his address at Jackson Hole, conversely, allowed the greenback to spread its wings.
“Bear” flattening. This is the term for a situation where short-term bond yields rise faster than long-term yields. It signals that the Fed is ready to raise rates. And it must be said, investors have every reason to think so. Two phrases from Kevin Warsh turned the market’s worldview completely upside down. The Fed Chair does not consider current monetary policy to be restrictive, nor was he misled by recent signs of slowing inflation.
And there were other remarks, too! That the Fed still has a lot of work to do. That interest rate adjustments remain the primary tool. That the 2% inflation target is a fixed figure. Kevin Warsh was not sparing with his “hawkish” rhetoric at Jackson Hole, which surprised Deutsche Bank. The bank now expects federal funds rate hikes in September and December, aligning with new forward market indicators. Derivatives have priced in the probability of monetary tightening in early autumn, raising it from 38% to 60%. They assess the probability of two monetary policy tightening cycles in 2026 as even odds (50/50).
Kevin Warsh was more candid than ever. And with this candor, he has essentially backed himself into a corner. Markets interpreted his speech as a clear signal of a rate hike in September. Now, only weak employment and inflation data ahead of the upcoming FOMC meeting can change the situation. Otherwise, the Fed will be forced to tighten monetary policy. Failure to do so after such “hawkish” rhetoric from the Chair at Jackson Hole would shake confidence in the central bank.
At the same time, Kevin Warsh risks incurring the wrath of Donald Trump. The occupant of the White House is unlikely to be pleased if the Fed resumes a cycle of monetary tightening ahead of the midterm elections. There is a fine line between love and hate, and the US President clearly lacks patience. This is evidenced by the resumption of US bombings in Iran, despite the previous emphasis on an economic blockade of Tehran.
An escalation of the conflict in the Middle East is a direct path to accelerating inflation, raising the federal funds rate, and strengthening the US dollar.
Short positions on EUR/USD, initiated at 1.17 and added to at 1.167, should be held. The inability of the major currency pair to reclaim the 1.16 level is a trigger for new selling.
