Bond Investors Question September Fed Hike Despite Warsh’s Hawkish Tone

The odds of a September interest-rate increase by the Federal Reserve have risen in financial markets, but some global bond investors still doubt whether Fed Chair Kevin Warsh will follow through.

Bloomberg reported on Aug. 30 that major asset managers including ABN Amro Investment Solutions and Brandywine Global Investment Management are taking a cautious view of the growing expectation of a September move. Warsh reaffirmed his resolve to curb inflation in a Jackson Hole speech on Aug. 28, but investors remain unconvinced that the remarks will translate into action.

Markets moved quickly after Warsh’s comments. Swaps are pricing in about a 60% chance of a rate increase next month, and the yield on the policy-sensitive two-year Treasury note posted its biggest rise in more than two months.

Investors are also focused on the fact that Warsh emphasized price stability in June and July but left the benchmark rate unchanged both times. Since taking office, he has offered less explicit forward guidance on the future path of rates than previous Fed chairs, making policy harder for markets to read.

Christophe Boucher, chief investment officer at ABN Amro, said the Fed’s reaction function remains unclear. If Warsh does not support a rate increase in September and inflation is still stubbornly high by then, concerns about the central bank’s credibility could resurface. That uncertainty has kept him away from long-dated Treasuries.

Tracy Chen, a portfolio manager at Brandywine, said hawkish rhetoric from Warsh is not enough on its own. “Words are words, and actions matter more,” she said. Brandywine is maintaining an underweight position in long-dated Treasuries, though it has pared that stance somewhat after the U.S. Treasury said this month it would at least double buybacks of bonds with maturities of 10 to 30 years.

Employment and inflation data will be central to the Fed’s next decision. In his Jackson Hole speech, Warsh described the U.S. labor market as healthy while showing greater concern about price stability, one half of the Fed’s dual mandate. He also said recent inflation readings came in below expectations but were still not enough to establish a clear trend.

Some investors say financial markets may be getting ahead of the Fed by assigning too high a probability to a rate increase. George Catrambone, head of Americas fixed income at DWS, said a run of moderate economic data followed by a Fed decision to keep rates unchanged could show that markets had moved too aggressively. Recent retail sales and employment figures, he added, have not clearly pointed to a renewed acceleration in growth.

Goldman Sachs also said the Fed’s September decision will be an important test of market confidence. Its researchers said that if the central bank leaves rates unchanged again without offering an adequate explanation, despite the lack of a clear signal that inflation has stabilized, the yield curve could face sharp swings similar to those seen in July.

The market’s focus is now on whether Warsh’s hawkish message leads to an actual rate increase. If the Fed does move, confidence in its commitment to tackling inflation could strengthen. Some investors say that even if short-term yields rise, such a move could ultimately help stabilize long-term Treasury yields.