Fed Chair Warsh speaks in words while the bond market speaks with rising yields

The Fed is likely to raise short-term interest rates in September because persistent inflation, resilient growth and rising long-term yields have left Chair Warsh little room to delay action.

• Warsh reaffirmed the Fed's 2% PCE inflation target at Jackson Hole and assigned responsibility for 65 months of sustained elevated inflation to the central bank.
• After the July FOMC meeting, long-term Treasury yields rose and the yield curve steepened, signalling market doubts about the Fed's willingness to contain inflation through policy rates.
• The US economy appears to have reaccelerated, supported by strong corporate capital expenditure, large-company earnings, near-record equity prices and capital flowing into AI investment.
• Inflation remains moderately elevated across median and trimmed-mean measures produced by different regional Federal Reserve Banks; only a sharp deterioration in employment or a rapid weakening in CPI or PPI would undermine the September-hike case.
• Global sovereign yields are also rising because of persistent geopolitical pressures on oil, concerns about developed-market deficits and expected tightening by the European Central Bank and Bank of Japan, while US deficits are close to 6% of GDP.

Takeaway: Federated Hermes expects a September rate hike and its fixed-income committees recommend short duration and a Treasury yield-curve flattener, while warning that inflation and trade-policy developments remain uncertain.