Awkward! Kevin Warsh May Hike Interest Rates as Fed Chair, Not Cut Them

"Yesterday's Consumer Price Index (CPI) report came in above Wall Street expectations , and this morning's Producer Price Index (PPI) report ran even hotter. Together, the two inflation gauges delivered a message bond markets understood immediately: inflation is not done fighting."

"According to the latest data release from the Bureau of Labor Statistics, headline CPI rose 3.8% year over year, topping economist forecasts of 3.7%. Core CPI - which strips out food and energy prices - climbed 2.8%. If that was not enough, the PPI report released this morning showed wholesale inflation rising 6.0% annually. Economists surveyed by Bloomberg had expected 4.9%."

"That means businesses are paying more for goods and services before those costs even reach consumers. Historically, hot PPI numbers often filter into future CPI reports because companies eventually pass along at least part of those costs. The bond market reacted quickly: Source: CME FedWatch Tool, U.S. Treasury data Surprisingly, markets are now beginning to price in the possibility that the Fed's next move could actually be a rate increase rather than a cut."

"Ironically, the man many investors expected to champion aggressive rate cuts may instead find himself considering hikes. That creates an awkward backdrop for Kevin Warsh, who was just approved by the Senate to join the Federal Reserve Board of Governors and is widely expected to soon replace Jerome Powell as Fed chair."

Headline CPI rose 3.8% year over year, exceeding forecasts, while core CPI increased 2.8%. Producer prices rose 6.0% annually, also above expectations. Higher PPI indicates businesses are paying more for goods and services before those costs reach consumers. Historically, elevated wholesale inflation often feeds into later consumer inflation as companies pass along part of the added costs. Bond markets responded by shifting expectations, beginning to price the possibility that the Federal Reserve could move toward a rate increase rather than a cut. This creates a difficult policy environment for Kevin Warsh as he joins the Board of Governors and is expected to play a major role in future rate decisions.

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