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Two weeks ago the market had all but written off a September rate hike. On Friday it put the odds back above 55 percent, a jump of roughly 20 percentage points in a single day. The trigger was Kevin Warsh's first Jackson Hole speech as Chair, marking his 100th day in the job. He said he was impressed by the economy, then delivered the line that mattered: this summer's better inflation readings do not tell him that underlying trends have meaningfully improved. Earlier in the week, July PCE had come in slightly hotter than expected. Nvidia beat and guided higher. And yet the most consequential thing Warsh said had nothing to do with rates directly. It was his description of financial conditions as not restrictive.
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Wednesday set the table. July PCE, the Fed's preferred inflation gauge, rose 0.2 percent on the month against expectations of 0.1 percent, with the annual rate at 3.7 percent versus the 3.6 percent forecast. Core PCE held at 3.3 percent, in line. Not alarming, but not the continued cooling that CPI and PPI had suggested two weeks earlier. Then Warsh spoke on Friday. He refused, again, to offer forward guidance or a reaction function, saying he stands committed to a discipline rather than to a decision, and adding that markets should not look primarily to the Fed for their next trade. He named PCE as the gauge he will act on, called the 2 percent target firm and fixed, and said the Fed may still have work to do.
The phrase worth understanding is that financial conditions are not currently restrictive. Financial conditions describe how easy it is to borrow and take risk across the whole economy: stock prices, credit spreads, borrowing costs, volatility. With equities near records, the VIX around 2026 lows, and credit still flowing freely, the Fed is effectively saying its policy is not biting as hard as the rate level implies. That has a circular quality worth sitting with. A rising market can itself become part of the argument for tighter policy. Markets responded accordingly: the two-year yield rose almost 8 basis points to 4.31 percent, its highest since late July, the ten-year reached 4.72 percent, and September hike odds climbed to about 55.7 percent from roughly a third earlier in the month. Separately, trade tensions escalated as Canada announced dollar-for-dollar retaliation against new US tariffs.
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US30 (Dow Jones) |
53,560 | +0.5% w/w |
The Dow closed at 53,560, up 0.5 percent for its first winning week in three, with the S&P adding 0.5 percent to 7,711.76 and the Nasdaq gaining 0.9 percent. A midweek rally on Nvidia's strong results did the heavy lifting before Friday gave some back. The revealing detail sits underneath: the Russell 2000 fell 1.37 percent on Friday alone while the Dow was almost flat. Smaller companies typically carry more floating-rate debt and refinance more often, so they feel a jump in hike expectations first and hardest. When large caps hold and small caps drop sharply on the same headline, that gap is usually the rate story showing up before anything else does.
Price action suggests: Resilience at the index level masking clear rate sensitivity beneath, with small caps absorbing the pressure.
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Gold (XAUUSD) |
Weekly close ~$4,630 | +9.5% in August |
Gold closed the week around $4,630, higher again over five sessions and up more than 9 percent across August, though Friday brought a pullback to a one-week low as Warsh's remarks lifted the dollar and yields. The month tells the fuller story: gold spent August climbing on fiscal worries, a soft dollar, and bond market stress, and then met its natural opponent at the end of it. Higher rates raise the cost of holding an asset that pays no income. That is the tension going into September, with the fiscal concerns that drove the August rally still unresolved and rate expectations now moving against it.
Price action suggests: A strong month meeting resistance from rate expectations, with Friday's rejection the first real test of the August trend.
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WTI Crude Oil |
~$83.50 | steadier week |
WTI traded near $83.50 with Brent around $88, a calmer week after two months of sharp swings. Fresh US sanctions on Iran early in the week kept a floor under prices, while the absence of any new escalation removed the upward pressure. After July's roughly 20 percent surge and the violent moves of early August, this was the first genuinely quiet stretch. That matters for the inflation debate as much as any single print, because a stable oil price gives the pass-through from energy into consumer prices time to fade rather than renew itself. Whether it holds depends entirely on the shipping corridors, which remain unresolved.
Price action suggests: Consolidation at elevated levels, with the risk premium neither building nor unwinding this week.
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EUR/USD |
softer | dollar to 1-week high |
The euro eased as the dollar index rallied to a one-week high, gaining about 0.4 percent on Friday alone after Warsh spoke. This is worth comparing with last week, when the dollar sat at a three-month low because investors were worried about fiscal credibility even as yields rose. This week higher yields and a hawkish Chair pulled the dollar back up. Same currency, two different stories in consecutive weeks. The rate story reasserted itself over the fiscal story, at least for now, and the euro simply moved on the other side of that shift rather than on any European development.
Price action suggests: A pullback from recent highs as the rate story overtakes the fiscal one in driving the dollar.
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GBP/USD |
eased with the euro |
Sterling gave back ground as the dollar firmed, moving closely in step with the euro once more. There is a useful habit in watching that. When the pound and the euro fall by similar amounts on the same day, the cause is almost always on the US side, and there is little point hunting for a British explanation. The pound has now spent most of August as a passenger, first rising on dollar weakness and now easing on dollar strength, without a domestic catalyst of its own. That changes when the Bank of England next meets or when UK data surprises, and not really before.
Price action suggests: A mirror of the euro's pullback, confirming the dollar leg is in control of the pair.
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USD/JPY |
yen pressured again |
The yen came under pressure again as US yields climbed and the dollar strengthened. This is the fourth consecutive week we have covered this pair, and the pattern has been consistent throughout: intervention in late July, a fade, then a brief recovery on dollar weakness, and now renewed pressure as the rate gap widens once more. Nothing about Japan changed in any of those weeks. What changed each time was the US side. It is a clean demonstration that in a pair where one country's policy is moving and the other's is not, the moving side sets the direction, and official intervention only interrupts it.
Price action suggests: Renewed upward pressure from the widening rate gap, keeping intervention risk alive at higher levels.
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USD/CAD |
back above 1.40 | tariff pressure |
Last week the pair broke below 1.40 for the first time in weeks. This week it climbed back above, and the reason is instructive. A third driver arrived. Prime Minister Carney announced dollar-for-dollar retaliation against new US tariffs, and Washington signalled it was considering further measures. Tariffs hit the currency of the smaller, more trade-dependent economy harder, and Canada sends the large majority of its exports south. So a level that broke on oil strength and dollar weakness reversed on a trade dispute that had nothing to do with either. Worth remembering when a breakout looks decisive.
Price action suggests: A failed breakdown as trade tensions introduce a driver that outweighed both oil and the dollar.
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→ Looking Ahead
| Sep 4 |
August non-farm payrolls, the first of two major data points before the Fed meets, and the counterweight to July's 23,000 job losses. |
| Mid-Sep |
August CPI, the second data point Warsh referenced, arriving days before the decision. |
| Sep 15 |
FOMC meeting (Sept 15 to 16) with a new dot plot, the first projections since Warsh withheld his own dot in June. |
| Ongoing |
The US and Canada tariff exchange, now a live driver for USD/CAD alongside oil. |
| Watch |
Financial conditions themselves, since Warsh has now named them as part of his assessment. Equity strength is no longer neutral for policy. |
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Warsh said something on Friday that is easy to skip past: markets should not look primarily to the Fed for their next trade. Whatever you make of him, that is a fair challenge. A great deal of energy goes into guessing the next policy move, and comparatively little into understanding how the pieces connect. Two data points arrive before the September meeting, and there is no need to front-run either of them. Manage your risk for a range of outcomes, and stay patient.
Fed'n Markets
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Sources
Federal Reserve, CNBC, Reuters, Bloomberg, Washington Post, PBS News, Yahoo Finance, Schwab, Trading Economics, Barchart, Forbes, and the Bureau of Economic Analysis. Market levels reflect closing prices for the week ending August 28, 2026, and are approximate general references, not official benchmark prices.
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