Warsh's Inflation Warning Pushes Traders Toward a September Rate Increase

Federal Reserve Chair Kevin Warsh told the Jackson Hole symposium on Friday that underlying inflation has not improved enough, and markets spent Monday adjusting to what that means. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said, according to CNBC's account of the speech. Traders raised the implied probability of an increase at the September meeting to roughly 55% to 60%, from about 35% before he spoke.

Asian trading opened lower. Japan's Nikkei 225 fell 1.1% and the broader TOPIX eased 0.5%, while South Korea's KOSPI dropped 1.5% with Samsung Electronics and SK Hynix among the largest drags. The Hebrew-language financial daily Globes described two separate worries driving the session, the overnight exchange of fire between the United States and Iran, and rising bets on an American rate increase. Euronews reported that the same combination lifted crude while investors weighed the policy path.

Gold, which had climbed through August, fell to about $4,445 an ounce in early Asian hours before steadying near $4,464, and Investing.com attributed the selloff to the revived expectation of a rate increase. The dollar index traded near 99.60.

This repricing contains a tension worth stating plainly. Warsh is signaling tighter policy at the same moment an oil supply shock is pushing headline prices higher. A central bank that expanded credit for years now faces inflation it cannot fight without slowing the interest-rate-sensitive parts of the economy that same credit expansion helped inflate.