Markets rally as Warsh begins Fed tenure after weak jobs

Short-term Treasury yields and breakeven inflation fell while risk assets and credit were steady after the June jobs report and the start of Kevin Warsh’s term as Federal Reserve chair.

June payrolls rose by 57,000, well below forecasts, and the unemployment rate ticked down to 4.2%. The unemployment decline reflected a drop in the labor force participation rate to 61.5%, rather than a surge in hiring. Market-implied odds of a July rate increase declined and the front end of the Treasury yield curve rallied.

Warsh has emphasized an inflation-focused policy in remarks at the recent Federal Open Market Committee meeting and at the Sintra conference. Short- and medium-term inflation expectations moved lower after those remarks, according to market measures.

Inflation remains above the FOMC’s 2% goal. Shelter disinflation has flattened, goods-price declines associated with earlier tariff effects are fading, and services inflation excluding housing has flattened at a pace that is not consistent with a 2% target.

In a note, Sage Advisory economists Komson Silapachai and Thomas Urano wrote that if inflation holds at current levels they expect the Fed to raise rates by year-end. The economists added that the Fed’s policy framework has become more data-dependent, making upcoming Consumer Price Index releases influential for interest-rate expectations and asset prices.

The Sage note said current market acceptance of Warsh’s inflation message depends on future inflation readings, and that hotter inflation prints would test that standing and could prompt a more aggressive tightening response.

With payroll growth softening, the note said policymakers are likely to weigh incoming inflation readings more heavily than labor reports when setting policy over the remainder of the year.