Market Reassesses Fed Policy after Warsh's Hawkish Tone, Dollar Strengthens

By not revealing much on rates or the economic outlook, Kevin Warsh generated an impression that he would be secretive, sparking a negative response. But his actual comments focused heavily on the economy's strength and the persistence of high underlying inflation. While he stopped short of predicting a near-term rate increase, he forcefully stated the Fed would achieve its inflation target.

The market has needed time to digest the full hawkishness of his remarks. The probability of a September rate hike has now climbed to 57%, up from 33% before his speech, and this has boosted the US dollar across the board.

The euro has quickly dropped to 1.1605 from 1.1643.

The pattern is consistent elsewhere, with the US dollar notably but not dramatically stronger. Some lingering doubt remains that he is too aligned with Trump and may ultimately refrain from hiking, which tempers the moves. However, I find that perspective hard to credit given his statements and the stability of his position.

"We have work to do," he stated, a clear signal in my view.

As the dollar rose, gold gave back gains, falling $33 after an earlier spike to the day's highs in what turned out to be a misguided move ahead of Warsh's remarks.