Warsh Under Pressure as Back-to-Back Hot Inflation Prints Set Up September Hike

Key Takeaways:

• Two consecutive hotter-than-expected inflation readings have undercut the wait-and-see approach most Fed officials had been counting on, setting the stage for a rate hike at next week's FOMC meeting.

• Core CPI, which strips out food and energy, has held stubbornly above target, adding to pressure on Fed Chair Kevin Warsh to deliver the tightening move markets have increasingly priced in.

• The Fed left rates unchanged at 3.50%-3.75% at its July meeting with three officials dissenting in favor of an immediate hike, a split that left the door open for a move at the next gathering.

Market Summary:

The narrative heading into next week's Fed meeting has shifted decisively hawkish. For months, a majority of central bankers had been hoping price pressures would ease on their own, giving the Fed room to hold policy steady while it watched how the economy absorbed elevated uncertainty tied to the Middle East conflict and tariff effects. Back-to-back hot inflation readings have undercut that thesis, and the market reaction has followed accordingly, with a rate hike next week now looking like the base case rather than a tail risk.

The July FOMC meeting offers useful context for how divided the committee already was. The Fed held the federal funds rate at 3.50%-3.75% for a fifth straight meeting, in line with expectations at the time, but three voting members dissented in favor of raising rates immediately, a signal that hawkish sentiment was building well before the latest inflation data arrived. Fed Chair Kevin Warsh, who has consistently downplayed the value of explicit forward guidance and instead pushed the market to read incoming data for itself, now faces a test of that approach: with two straight upside inflation surprises on the board, the pressure to actually deliver on the hawkish rhetoric has grown difficult to ignore.

Fed Governor Christopher Waller had offered a narrower path back to a hold, saying he'd support keeping rates steady if the August CPI report confirmed inflation was genuinely cooling. That data instead came in hot, closing off the option Waller had floated and reinforcing the case for action. With next week's decision now widely expected to bring the Fed's first hike in more than three years, currency markets are likely to stay sensitive to any fresh commentary from Warsh or other officials in the days leading up to the meeting, since the size and tone of the move, not just the decision to hike itself, will shape how the Dollar trades into the fourth quarter.