Bank of America: Warsh Was Dovish, but September Hike Risk Remains - FJElite

Warsh’s July press conference struck a dovish tone and offered little clarity, prompting a rise in long-end yields led by breakevens and renewed questions over Fed credibility. The need to restore that credibility could increase the likelihood of a September hike, supporting the forecast for 25bp hikes at each of the remaining three meetings this year.

The July jobs and CPI reports will be crucial. Soft data would validate Warsh’s stance, while firm data would put the focus on the yield curve: flattening would suggest confidence that the Fed will act, while steepening would signal that policy is falling behind the curve. July payrolls are expected to rise by 80,000, with private payrolls up 95,000, while unemployment is forecast to edge up to 4.3% as participation rebounds. A result in line with these forecasts would support the view that labour-market downside risks have faded and reinforce the case for three further hikes.