Jackson Hole: hawkish message as Warsh remains vigilant on inflation

Highlights: The Fed Chair struck a hawkish tone at Jackson Hole, reaffirming his commitment to returning inflation to 2 per cent while stopping short of signalling an imminent rate hike. We maintain our base case for rates at 3.50–3.75 per cent through 2026 and 2027, but the risk of renewed tightening has increased if inflation surprises to the upside; the remaining 2026 meetings thus remain “live”. The hawkish tone pushes up short-dated yields, but the meeting also boosts the Fed’s credibility on inflation, anchoring breakevens. For portfolios, resilient growth and broadening earnings support our constructive stance on US equities and USD, while bond allocations with active management or measured duration continue to provide income and diversification. We also add alternatives to manage volatility and favour multi-asset portfolios.

• Warsh’s message puts inflation firmly back at the centre of the Fed’s reaction function. He described an economy that has strengthened and labour markets that remain broadly consistent with full employment, while noting that financial conditions are not particularly restrictive.
• But the bar for declaring victory on inflation remains high. Warsh stressed that a few softer inflation readings are not enough to establish a sustained return to 2 per cent target. The Fed will be watching not only whether inflation is moving lower, but also the pace of that improvement
• The speech leaves the remaining meetings open, even without an explicit near-term hike signal. We continue to expect the policy rate to remain at 3.50–3.75 per cent through 2026 and 2027, but the September, October and December meetings remain “live”. Incoming inflation data will be decisive in determining whether the Fed can remain on hold or needs to respond to renewed price pressures
• Markets interpreted the message as a higher-for-longer signal. Front-end Treasury yields rose as investors increased expectations for future tightening, while longer-term yields were better contained, flattening the curve. The dollar strengthened as concerns over Fed credibility and “USD debasement” fears eased