Citi Research has introduced a new gauge called the "Warsh Shadow Rate," derived from the economic and financial indicators highlighted in former Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole symposium. The metric is currently close to historic peaks that have accompanied previous Fed tightening cycles and has shown a tendency to lead movements in two‑year Treasury yields.
The shadow rate places emphasis on indicators Warsh described as predominantly hawkish, including underlying inflation, money‑supply growth, labour‑market claims, broader financial conditions and equity‑market signals. By contrast, it downplays indicators that have softened, such as inflation expectations, wage growth and headline non‑farm payrolls.
Citi economists have outlined core CPI thresholds that could shape expectations for a September policy decision. A month‑over‑month rise of 0.3% or higher would likely increase the probability of a hike, a 0.1% increase could defer it, while a 0.2% reading offers no clear guidance.
If the Fed moves to raise rates in September, market participants would face the challenge of keeping the 30‑year Treasury yield below 5.3%, with the 10‑year yield also expected to climb. Historically, equities tend to weaken for roughly 50 trading days after an initial Fed hike, recovering only after that period unless a sharp rise in volatility accompanies the rate increase. Bonds have historically underperformed for a longer stretch following a hike.
Analysts note that a strong August inflation reading could turn the September meeting into a live hike decision, pushing Treasury yields higher, weighing on gold, while equities may exhibit relative resilience.
