Warsh's First Surprise Test: Fed Hike Odds Hit 34%
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- Markets now price roughly 34% odds of a Fed rate hike at this week's FOMC meeting, up from 16% a week ago, according to the CME's FedWatch tool.
- Persian Gulf hostilities re-escalated after the Fed's last public communications, sending oil prices and longer-term bond yields higher and pushing traders toward pricing in a hike.
- Kevin Warsh has repeatedly spoken of entering policy meetings with an open mind and letting "family fights" decide outcomes — implying a wider aperture of potential moves than under his immediate predecessors.
- Bill English, former top Fed economist, says markets will be surprised no matter what the FOMC does given a one-third priced-in hike probability, and warns the bigger risk is failing to clearly explain the reasoning behind any decision.
- Christine Lagarde left ECB rates unchanged last week and argued policymakers cannot overinterpret fast-moving oil swings while the Middle East conflict remains unresolved.
- Jerome Powell said in September 2015 he wanted market odds "way north of 50 percent" before raising rates — "in my perfect world it would be 100 percent" — citing the 2013 taper tantrum as a cautionary lesson about surprising bond markets.
Why it matters: A rate hike — or even a non-hike that markets have only partially priced in — could end the era in which the Fed telegraphed its intentions in advance. With Persian Gulf tensions driving oil prices and roughly 34% odds of a hike, Warsh faces a Wednesday press conference where he must explain his reasoning more clearly than in prior public comments, or risk the kind of bond-market disorder that defined the 2013 taper tantrum.
