Markets Are Confused About the Fed, Just as Chair Warsh Wants It

Markets can’t tell where Fed interest rate policy is going, and that’s just the way Chair Kevin Warsh wants it. This bodes ill for stock markets.

• Consumer confidence fell when forecasters expected a rise, and new home sales collapsed 10.5% on the month
• Beyond September, no interest rate outcome carries better than even odds through the end of 2027 as traders struggle to pin down Fed policy
• Chair Kevin Warsh rejects forward guidance, which makes his first Jackson Hole address an unusual kind of event risk

Stock markets are drifting sideways after a shallow pullback last week. The bellwether S&P 500 is narrowly outperforming a somewhat soggier Nasdaq 100, where the hangover after a blistering AI-powered rally has been playing out since the start of June. Crude oil prices have eased amid reports that Iran has resumed talks with Oman to reopen the Strait of Hormuz, after the Treasury Department announced new secondary sections. Long-dated Treasury bonds climbed to the top of their monthly range. Gold continued to inch higher while the US dollar licked its wounds near three-month lows.

On the economic data front, a Conference Board gauge of US consumer confidence fell in August when forecasters had penciled in an increase, while new home sales suffered a monthly drop of 10.5% in July, marking the worst performance since January. The run of soft US economic data now stretches through most of the month, white-hot S&P Global PMI results notwithstanding.

Two different kinds of falling inflation

The Federal Reserve’s preferred price gauge, the personal consumption expenditures (PCE) index, is due next. The headline rate seen easing to 3.6% year-on-year in July from 3.7% previously, while and the core measure excluding food and energy prices holds at 3.3% for a second month. This hints that much of the expected disinflation reflects the oil shock from the US-Iran war washing out of the figures, which is unremarkable. The question is whether anything else is fading also.

The evidence says yes. Analog consumer price index (CPI) inflation data undershot expectations, with roughly half of the decline in the headline reading coming from softening core services. Wholesale prices measured by the producer price index (PPI) told a similar story. As it happens, the three-month annualized pace of PCE inflation has been easing since the start of the year, and the six-month measure may have now crested too. Inflation cooling because crude oil is cheaper is one thing. Sagging demand-pull price growth in the core of the economy is far more ominous.

Even the rare good bit of recent economic news pointed to disinflation. That S&P Global PMI survey showed the fastest US activity growth in about four years, and led by services at that. This ought to be the composition that a healthy expansion should have. Nevertheless, a glance under the hood reveals that sub-indexes tracking prices fell across both services and manufacturing in August’s report, on inputs and outputs alike.

Gold and the dollar saw it first

Precious metals seemed to have read these tea leaves weeks ago. Through July, real interest rates climbed to their highest since early April 2025, when the Trump administration’s “Liberation Day” tariff rollout panicked markets. Non-yielding gold ought to have suffered in that environment. It held instead, a display of considerable resilience, and sprang higher once yields stopped climbing. The dollar mirrored the logic in reverse, refusing to rally on improving carry before selling off into month-end and falling ever since.

Bonds are only now joining them. That might be why Treasury Secretary Scott Bessent’s buyback expansion, a modest increase from $2 billion to $4 billion per operation that he openly called a signal rather than an attempt to force the market’s hand, has held up better than its size suggests. When long-term yields spiked to their highest since 2007 this month, the move could not even survive the session. Treasuries have since outperformed equivalent maturity swaps, narrowing the 30-year spread to the smallest since February. This hints that officials may have nudged markets in a direction that they were already leaning in.

Nobody knows where policy is going

Against this backdrop, traders seem utterly confused about where central bank policy is heading. Fed Funds futures put the cumulative odds of a 25-basis-point (bps) rate hike by December at almost 96%. That seems like conviction, but looking at the odds of a given result tells a wholly other tale. Only September shows genuine agreement, with traders betting roughly 60/40 on a rate hold and writing off alternative scenarios. From October onward, no single outcome commands better than even odds. The further out one looks, the less traders agree and the more dispersed the possibilities.

What does seem clear however is that the chances of one, two and three hikes by December have diminished throughout August, in step with a steep drop in Citigroup’s US economic surprise index and the parallel slide in the Atlanta Fed’s GDPNow model, where the estimate of third-quarter growth dropped from about 6% to 4% in a mere three weeks. Disappointing news-flow appears to pulling the policy outlook in a more dovish direction.

A chair who prefers the fog

Kevin Warsh steps back into the fray on Friday, delivering his first Jackson Hole keynote speech as Fed Chair. The symposium has functioned for years as a kind of tuning exercise, where the US central bank chief teaches markets to read incoming data so their reaction function resembles that of policy officials themselves. Warsh has loudly rejected that approach. He seems to have elevated obfuscation to key function of the job, reversing the transparency doctrine the Fed has followed since the 2008 financial crisis and the Ben Bernanke years. He styles himself closer to an Alan Greenspan figure, tactically muddying the waters in a bid to force the markets to think independently and manage risks themselves.

A speech that settles nothing may therefore leave traders to fill the silence with the only material they have, which is three weeks of disappointing data. That points to further dovish repricing, which might give bonds some room to follow where gold and the dollar have been leading. Equities are an awkward case in this scenario. Lower rate expectations arriving because the economy is cooling seems hardly encouraging for earnings prospects and risk appetite more generally. If cyclical concerns take hold, a market already on be backfoot may find that what looked like a modest pullback was actually the formation of a major top.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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