What a ride! We went from a 76% chance of no change to an 88% chance of a 25bps hike in less than a month:
What pushed the market towards this view? We have three inflection points:
Warsh’s Jackson Hole speech, and more precisely, his hiking path parable, along with his hard stance on inflation.
PPI coming in hotter than expected.
CPI coming in slightly above expectations, days after the PPI print.
In essence, the market took in an extremely complex situation (current-state global economy) and applied a rather simplistic heuristic—if CPI=cool then hold, else hike.
Is this a place in which a nuanced approach gives alpha? Or rather, should I conform to the crude reasoning of the market? Kevin Warsh is a new chair trying to implement a new regime, so I think we should all decide for ourselves. After all, that’s what Warsh wants us to do!
I am a fan of a nuanced approach.