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 damage landed

South Korea and Taiwan led the equity declines, dragging the broader MSCI emerging-market index lower.

On the currency side, the Indonesian rupiah stood out as a notable underperformer, though the broader emerging-market currency index posted a relatively modest 0.1% decline. The greenback climbed to two-week highs, buoyed by both Warsh’s rhetoric and a less-than-stellar batch of Chinese PMI data that added to the risk-off mood.

Two-year Treasury yields pushed to 4.33-4.34%, reflecting the market’s recalibration of rate expectations.

Geopolitical tensions in the Middle East didn’t help either, adding another reason for investors to retreat toward haven assets.

What investors are watching now

The September Fed meeting has become the most important date on the calendar for global macro traders. A move from 35% to nearly 60% implied probability of a hike is significant, but it’s not a done deal. Between now and the decision, several data releases, including another jobs report and CPI print, could shift expectations in either direction.

The nine-session currency rally that preceded this sell-off suggests some investors had been positioning for a more dovish Fed pivot. Warsh’s Jackson Hole speech functionally closed that door, at least for now.

Fixed-income traders should note that two-year yields at 4.33% imply the market sees the Fed’s terminal rate settling meaningfully above the current 3.50-3.75% range.

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