Federal Reserve: September hike bias shifts – ING

James Knightley of ING suggests that Federal Reserve Chair Kevin Warsh's hawkish stance in his Jackson Hole speech has shifted the central bank's reaction function towards a September rate hike, despite ING's macro projections indicating the Fed may wait. The analysis highlights inflation exceeding the target, robust activity, but pressure on households.

The analysis concludes that a 25 basis point hike is now more probable than holding rates steady, with rates likely remaining unchanged through 2027. Warsh emphasized inflation, noting it has been above target for 65 consecutive months, and believed financial conditions in an environment of full employment are not tight. This has led to the reconsideration of the September Fed decision, shifting from the Fed holding rates unless the data supports a hike to hiking unless the data justifies a pause.

Two key data points ahead of the decision are the September jobs report and the September CPI print. Previously, a non-farm payrolls figure above 75k and an unemployment rate of 4.1% with core CPI increasing month-over-month by 0.3% or more would warrant a rate hike. However, given the hawkish stance, a jobs figure below 25k, or even net job losses, and a core CPI MoM reading below 0.2% MoM may prevent or delay a hike.

Warsh's credibility as a hawkish Chair has been questioned after going back to being hawkish in August after initially retracting in July. His focus on trends rather than individual data points suggests he has made his decision, and with no members on the FOMC openly opposing a rate hike, a 25 basis point increase now appears more likely than holding rates steady.