Warsh fans Fed rate hike bets, crude up on US-Iran strikes

HONG KONG

Bets on a Federal Reserve rate hike have surged after Kevin Warsh's speech, with upward pressure on prices coming from the spike in energy costs caused by the Iran war (AFP Photo)

Hawkish comments from Federal Reserve boss Kevin Warsh saw investors ramp up bets on a U.S. interest rate hike, while oil prices spiked after a fresh flare-up in the U.S.-Iran war.

With inflation remaining stubbornly high — largely on the back of elevated energy costs — the U.S. Fed has come under pressure to act, and Warsh's refusal to provide guidance has stoked uncertainty.

But in a highly anticipated speech at the Jackson Hole symposium of central bankers and economists in Wyoming last week, he left traders with few doubts that he was ready to increase borrowing costs.

Warsh said, "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

However, he stopped short of saying he would support a hike, adding: "I stand here today committed to a discipline, not to a decision."

Focus will now turn to a string of crucial data releases over the next two weeks before the Fed makes its decision, with jobs up this week and the consumer price index next week.

"Should we get an inline payrolls print that does not give the Fed too much to work with, next week's core CPI report will become the major decider for the market's Fed belief system," wrote Chris Weston at Pepperstone.

"The volatility priced around that outcome across rates, forex and equities could therefore be significant."

The Fed's battle against inflation has been hobbled by the Iran war.

And after a run lower for most of last week, oil spiked again on Aug. 31, a day after the United States said it attacked Iranian rocket launchers on a small island in the Strait of Hormuz.

"Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed," said Quintex Intel's Stephen Innes.