US | Cornered into a hike?

While far from a done deal, Warsh’s Fed has effectively cornered itself into a hike with its hawkish rhetoric. We now lean toward a 25bp rate hike aimed at preserving policy credibility, though a hold remains a distinct possibility.

Key points

• Key points:
• Underlying US domestic demand remains strong, likely reinforcing hawkish concerns about the risk of demand-driven inflation pressures.
• The latest jobs report dealt a significant setback to the dovish case for a September pause, reversing much of the concern that had emerged a month earlier.
• The August CPI report further complicated the case for holding rates steady this week by interrupting the recent run of favorable inflation readings.
• Recent data have considerably narrowed the case for another pause, shifting both the FOMC debate and market pricing toward a rate hike this week.
• Assuming Warsh joins the three July dissenters, only three participants who projected at least one hike would need to vote for one this week to secure a majority.

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