Is Warsh Not That Hawkish? Experts Analyze 'September Rate Hike Probability': Watch US July and August Data

The US Federal Open Market Committee (FOMC) voted 9 to 3 on the 30th to maintain the target interest rate range at 3.5% to 3.75%, marking the first time in nearly 10 years that so many dissenting votes were recorded. In response, Franklin Templeton's Deputy General Manager, Pei-Ling Liang, appeared on the program 'Financial Road to Prosperity' and analyzed that Federal Reserve Chair Kevin Warsh is 'not that hawkish.'

Liang pointed out that although this decision marks the highest number of dissenting votes since September 2016, Warsh welcomed the debate, calling it a healthy 'family discussion.' Liang emphasized that Warsh's leadership style differs significantly from previous chairs, and the market must adapt.

Liang: Warsh Wants to Gradually Reduce Forward Guidance

Liang explained that Warsh hopes the Fed will gradually reduce forward guidance, likening it to 'the market should learn to watch the ball, not the referee.' The 'ball,' in Warsh's analogy, refers to economic data and financial conditions—factors the Fed wants the public to focus on.

Liang noted that despite the decision triggering a sharp drop in US stocks, falling long-term Treasury prices, and soaring yields, short-term interest rates, the US dollar index, and gold prices remained stable. Financial markets had anticipated a rate hike in July, but since none occurred, short-term rates slightly declined.

The yield on the US 30-year Treasury bond surged to 5.244% on the 29th, the highest level since July 2007. Meanwhile, the 10-year Treasury yield also rose to around 4.67%. Although Warsh has pledged to combat inflation, all indicators suggest the goal is still far off, leading the market to question his ability to effectively control inflation.

Liang emphasized that long-term bond yields reflect market expectations for inflation and the economy. If the market doubts Warsh's ability to curb inflation, it will be immediately reflected in long-term yields. Another structural factor is the US fiscal deficit and fiscal stimulus measures in the UK and Japan, which are pushing up long-term government bond yields.

Over 60% Chance of Rate Hike in September?

Liang explained that current market expectations put the probability of a September Fed rate hike at over 60%. The Fed may hike rates in September and again by 25 basis points in January next year. However, based on Warsh's comments on the 29th, Liang argued that Warsh is not that hawkish.

Warsh believes that rising market interest rates can substitute for an official Fed rate hike. If this helps lower consumer inflation expectations, it would also help the Fed achieve its goals. In effect, Warsh is using 'verbal tightening' to reduce the need for actual policy action.

Liang advised investors to closely monitor US inflation data for July and August. If inflation shows a clear upward or sticky trend during these months, the Fed still has a chance to raise rates in September.