Emerging-market equities and currencies slide after Fed Chair Warsh signals higher US rates

Fed Chair Kevin Warsh walked up to the podium at Jackson Hole on August 28 and essentially told markets to brace for more pain. His message: the Federal Reserve isn’t done tightening, and inflation remains public enemy number one. The reaction was swift and predictable. MSCI’s emerging-market equities gauge dropped 1.4% on August 31, the steepest single-day decline since August 24, while a basket of developing-nation currencies slipped 0.1%, snapping a nine-session winning streak. What Warsh actually said The Fed chair told the Jackson Hole audience that the central bank must be “confident that underlying inflation is moving to our objective, clearly and at sufficient speed.” The numbers back up his urgency. July’s PCE inflation reading came in at 3.7% year-over-year, nearly double the Fed’s 2% target. Warsh noted that half of the index’s components were running above a 3% annualized rate. With the policy rate sitting at 3.50-3.75%, Warsh argued that financial conditions aren’t actually restrictive yet. Fed funds futures repriced almost immediately. The implied probability of a rate hike at the September meeting jumped to 57-60%, up from roughly 34-35% before the speech. Where the ...