Warsh Votes to Hold as Fed Splits 9-3, Market Cuts Hike Bets

Traders trimmed rate-hike expectations. The cumulative pricing for the next two meetings fell from 56 basis points to 50. The implied probability of a September hike dropped from near-certain to 65%. More striking was the steepening of the UST curve. The 2s10s spread recorded its sharpest widening since late March, driven by a rise in long-end inflation expectations. The 10-year inflation swap now sits just above 2.3%. That level is not alarming on its own, but AlphaScala's analysis said Warsh was likely unhappy with the shift, given his satisfaction with the post-June market reaction.

The macro case for tightening later this year remains intact, the analysis argued. AI-driven capex spending, a tightening labour market, and supportive fiscal policy all point to persistent inflation. If financial conditions ease further, Warsh may need to reconsider his vote as soon as September. AlphaScala maintains its base case for 25-basis-point hikes at the December and March meetings.

The Fed made no changes to its balance sheet policy. Warsh did not hint at any adjustments before the task forces report back, expected by year-end. The New York Fed continues to guide for reserve management purchases of T-bills at $10 billion per month.