Warsh Fails to Stabilize Fed's Anti-Inflation Credibility: JPMorgan Expects Rate Hike by Year-End

JPMorgan Chase (JPM-US) U.S. economic research team stated that Federal Reserve Chair Kevin Warsh's post-interest-rate-decision press conference last week was the most unsettling since such communication practices began in 2012, prompting the bank to advance its forecast for the next rate hike.

The research team, composed of Michael Feroli, Michael Hanson, and Abiel Reinhart, indicated that the market perceives the Fed's credibility in fighting inflation as weakened, thereby increasing the urgency for monetary policy to shift toward tightening. As a result, the team has moved the timing of the next rate hike forward dramatically—from the previously expected second half of 2027 to as early as December of this year.

Feroli and colleagues outlined these concerns in their latest weekly market outlook report for clients.

Feroli argued that although Warsh strongly declared his determination to combat inflation, he failed to provide concrete forward policy guidance and offered no clear explanation for maintaining the current interest rate level. Additionally, Warsh expressed skepticism about the Fed’s core inflation indicator—the Personal Consumption Expenditures (PCE) price index—further fueling market doubts.

At the time, Warsh stated that while PCE remains the Fed’s primary focus for now, he was uncertain how strategy might change after January next year, hinting that a special committee would conduct an evaluation.

JPMorgan economists believe that if even the Fed Chair himself is unsure about the direction of key metrics, market confusion is inevitable.

Bond markets have already reacted clearly. JPMorgan noted: 'Markets did not like what they heard; during Warsh’s remarks, the yield curve steepened noticeably, and breakeven inflation rates rose simultaneously.'

Feroli expects other members of the Federal Open Market Committee (FOMC) to feel mounting pressure to uphold price stability, predicting a 25-basis-point rate hike in December. He also acknowledges 'the risk that the FOMC could act as early as the September meeting.'

The July Consumer Price Index (CPI) report, scheduled for release on August 12, has become a critical indicator determining whether action will be taken at the FOMC meeting on September 15–16.

Bank of America economists echoed similar concerns in another report, noting that the bond market’s steepening yield curve, falling equities, and weakening dollar closely resemble reactions seen when emerging market central banks face credibility crises.

They bluntly stated that the Fed is陷入 a severe trust crisis, and unless upcoming data turns dovish, a rate hike in September will be unavoidable to reclaim policy control.

Meanwhile, New York Fed President John Williams, in a Monday Reuters interview, said the current monetary policy stance is appropriate but acknowledged that further action may still depend on core inflation data trends.