September Fed Hike Odds Jump to Nearly 60% After Warsh Signals Inflation Fight

Q: Could a September rate hike backfire if recent job losses signal a deeper economic slowdown?

Yes. A September rate hike could backfire if the recent job losses are the start of a broader downturn rather than a one-off weak payroll report. That risk comes from the Fed’s usual lag: higher rates take time to hit hiring, borrowing, housing and business investment. If labor demand is already weakening, another quarter-point increase could deepen that slowdown before policymakers have enough data to judge it. The July payroll decline of 23,000 was weak, and if it is followed by softer consumer spending, weaker corporate earnings or reduced capital spending, the case for more tightening would look much weaker. But the argument for a hike is that the broader economy still does not look recessionary. Warsh said labor markets remain near full employment, unemployment is still around the low-4% range, wages are still rising, and business investment and consumer spending have held up. Inflation also remains above target, with headline PCE at 3.7% and core PCE at 3.3%, and some underlying measures suggest price pressures are still persistent. That is why markets moved to price in higher odds of a hike after Jackson Hole. The practical issue for the Fed is whether the jobs miss signals a trend or noise. If upcoming data show further payroll weakness, softer income growth and weaker spending, a hike would carry greater risk of policy error. If instead hiring stabilizes and inflation stays sticky, a September move followed by a pause would be easier to justify.

3 articles · Updated · Yahoo Finance · Aug 28

September rate-hike odds climbed to nearly 60% after Fed Chair Kevin Warsh said inflation is still too high despite better-than-expected summer readings.
Warsh paired that warning with a robust view of the economy, saying growth has strengthened and the labor market remains stable at full employment.
35% was the market-implied chance a day earlier, underscoring how traders read the speech as de facto forward guidance toward a quarter-point increase.
PCE remained central to Warsh's framework, and he said he is also tracking corporate earnings, capital spending, asset prices, business confidence, incomes and consumer spending.
Former Fed officials Alan Blinder and Esther George said Warsh stopped short of a pledge but clearly laid out concerns that keep a September move in play.