Federal Reserve Chairman Kevin Warsh‘s emphatic declarations on Wednesday that inflation would be brought down without signaling a readiness to raise interest rates triggered a sharp selloff in bonds that may force a hard choice: defying President Donald Trump’s desire for easier monetary policy or battling a growing cadre of fellow U.S. central bankers determined to tighten it.

Complicating matters was Warsh’s hint that he may try to switch up the Fed’s yardstick for successfully containing inflation, for years defined as a 2% year-over-year rise in the Personal Consumption Expenditures Price Index. “That’s our number, we’re sticking with it,” Warsh said in a press conference after the end of a two-day policy meeting, before adding, “Who ‌knows, come after next January, ⁠what we might ⁠say about strategy. I suspect the task forces might have something to add.”

Warsh handpicked 15 outside experts in May to deliver recommendations by the end of 2026 on the Fed’s conduct of monetary policy, including its inflation framework. Warsh said on Wednesday he will check in with them in the next couple of weeks and may share any thoughts that are “ready for prime time” at the Fed’s global central bankers’ conference in Jackson Hole, Wyoming. Past Fed chiefs have used that late-August meeting to prefigure what the central bank may do at its meetings in September. Warsh has so far stuck to his promise to provide no guidance on the Fed’s likely rate path. The combination of Warsh’s repeated assertions of the need to tame inflation with no action to move it toward the 2% target and a hint that the goalposts themselves may change helped send 30-year Treasury yields above 5.2% on Wednesday, a 19-year high. They extended their rise on Thursday.

“That’s almost seen in that building as the markets voting ‘no ⁠confidence’ on ‌the Fed and the Fed’s willingness and capacity to bring inflation down,” said Nathan Sheets, the global chief economist at Citigroup. “He highlighted a problem and gave no strategy for solving it other than, ‘I’m a hawk, trust me,’ and the markets wanted more than that,” said Sheets, who worked at the Fed for 18 years. “I think part of it is ⁠if you lean too far into future hikes, then he’s disappointing the White House. And it is a balancing act between Warsh the hawk, which he is, and trying to stay on sides relative to 1600 Pennsylvania Avenue.” Sheets said Warsh will need to make a choice by September.

THE BREWING STORM

Warsh’s colleagues are already calling for action. Three of the Fed’s 12 voting policymakers dissented on Wednesday against the decision to leave the central bank’s benchmark interest rate on hold in the 3.50%-3.75% range. On Friday they and any others at the table are free to have their say, and analysts expect a deluge of commentary, given what Sheets called the “absolute red flag” of rising long-term bond rates. “While Warsh may try to constrain the Fed’s official communications and substitute ‘talk’ for action while waiting for ‘task forces’ to return a verdict, the regional Fed presidents, and perhaps members of the Board (of Governors), are willing to discuss their views in the open and will be doing so over the next few days and weeks,” said Thierry Wizman, global FX & rates strategist at Macquarie Group. “We ‌expect them to do a lot of damage control, and to highlight how they, if not Warsh, are ready to tighten policy.” Before the Fed’s meeting this week, some policymakers including two of those who dissented on Wednesday – Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack – had signaled their discomfort with leaving rates unchanged despite rising inflation. Others who voted with Warsh on Wednesday to keep rates on hold, including ⁠Fed Governors Christopher Waller and Lisa Cook, have said they too may call for rate hikes if they don’t see improvement in inflation soon. The U.S. Bureau of Economic Analysis reported on Thursday that PCE inflation eased in June to 3.7% from 4.1% in May, and underlying core inflation rose 3.3% last month after advancing 3.4% in May. The slight improvement had been widely anticipated after the release of other inflation data earlier this month, and policymakers have said they are worried about renewed upward price pressures due to the ongoing Middle East conflict and surging investment in technology related to artificial intelligence. Business spending on equipment increased at a 15.2% pace in the second quarter, the BEA said in a separate report on Thursday, marking a second straight quarter of double-digit growth. Trump so far has refrained from attacking Warsh for not delivering lower rates, blaming the new Fed chief’s fellow board members instead. “Board members have put Warsh on notice they intend to push for a hike in September if inflation does not meaningfully ease over the summer,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in a note. “If Warsh is indeed a dove in hawk’s clothing, he will not have as much support on the board to hold rates steady again in the face of persistently high inflation.”

Summer lull? Don’t even think about it. There’s a multi-trillion dollar selloff in AI-linked equities taking place, devastating wildfires across Europe and the war in the Middle East continues to rage.

In Asia, India holds a crucial central bank meeting against a complex backdrop, while Friday’s U.S. non-farm payrolls report comes as traders grow increasingly convinced that the Federal Reserve may have to hike interest rates again.

1/AI-WATERING MOVES

The AI-driven bull run has gone from seemingly unstoppable to spectacularly volatile in a matter of weeks.

Investors are increasingly uneasy about profitability, competition and who’s paying ‌for it all. Unprecedented volatility ⁠in chipmakers ⁠and other AI-related stocks is the result. South Korea’s KOSPI, which jumped 18% on Friday after tumbling 40% over the previous six weeks, is the prime example.

Pressure is emerging elsewhere too. The cost of insuring against default by some AI hyperscalers has risen as debt levels climb, while earnings reports are triggering increasingly dramatic market reactions.

More turbulence may lie ahead. Elon Musk’s SpaceX reports its first results since its blockbuster June IPO. Since then, its market value has slumped by an eye-watering $1 trillion.

2/WAR WORRIES

Markets will remain focused on the Middle East, where a U.S.-Iran ceasefire announced in mid-June now appears a distant memory and oil prices have climbed back towards $90 a barrel.
A drone strike on two U.S.-owned gas tankers in Egypt’s Mediterranean port of Damietta this week has opened a potential new front in the five-month conflict, raising concerns that traffic through the Suez ⁠Canal, one of ‌the world’s most important trade routes, could come under threat. In another first, Saudi Arabia publicly joined military strikes alongside U.S. forces this week, targeting Iran-aligned groups in eastern Iraq. The U.S. military also carried out what it described as a “heavy wave” of strikes against Iran after an attempted ballistic ⁠missile attack on U.S. forces in the region.

Diplomatic efforts continue, however. Saudi Arabia is seeking to lead a 14-country coalition to boost maritime defence in the Bab el-Mandeb strait, the Red Sea and the Gulf of Aden, all critical chokepoints for global energy supplies.

3/JOLT FROM JOBS?

Markets get a fresh read on the U.S. economy on Friday when closely watched non-farm payrolls data are released.

Economists polled by Reuters expect the July report to show payrolls increased by 91,000 jobs and the unemployment rate held at 4.3%. A stronger-than-expected reading could raise bets that the Fed may need to resume raising rates to contain persistently above-target inflation at its next meeting in September.

The central bank held rates steady on Wednesday, but three policymakers voted for a hike and Chair Kevin Warsh reiterated the Fed’s commitment to returning inflation to its 2% target.

4/ EUROPE’S BURNING ISSUES

Europe’s record-breaking heatwave looks set to ‌continue with fears mounting that wildfires that have devastated parts of Spain and France are spreading to Italy, Central Europe and Greece.

Markets should pay attention.

The economic costs are mounting, from healthcare spending and insurance claims to reconstruction bills and higher food prices, at a time when many heavily indebted governments are already grappling with the fallout of the Iran ⁠war. Adding to concerns, a ‘super’ El Nino event appears increasingly likely, raising the risk of further extreme weather globally.

In Britain, also facing wildfires and drought, major supermarket groups warn another food-price shock could be looming. In Germany, meanwhile, a contentious cabinet reshuffle has renewed pressure on Chancellor Friedrich Merz as the country also battles record temperatures.

DRUPEE

The Reserve Bank of India announces its latest policy decision on Wednesday, with most economists polled by Reuters expecting no change to the benchmark interest rate of 5.25%.

However, authorities will be attempting to prop up the rupee , one of Asia’s worst-performing currencies this year.

In June, the central bank unveiled measures designed to boost capital inflows and strengthen the balance of payments. The moves attracted more than $20 billion in their first month, but renewed strength in oil prices has since clouded the outlook.

For those thinking an interest rate increase might help, retail inflation has just breached the central bank’s target for the first time in over a year. Nevertheless, economists still expect the risks to growth to keep policymakers from acting, for now at least.

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Mumbai: Banking credit to industry remained robust, increasing 19% year-on-year due to broad-based growth from both large and small companies. Personal loan growth also remained strong, expanding 16% YoY compared to 12% a year ago, the latest sectoral data for June showed.

In the personal loan segment, loans against gold jewellery, which include certain agriculture loans, remained the fastest-growing sector, surging 93% YoY, data published Friday by the Reserve Bank of India (RBI) showed. Vehicle loans with a 17% growth were the second-fastest in the personal loan segment. Credit card outstanding growth decelerated to 2% compared to 7% recorded a year ago.

Growth in education loans also remained strong at 13% versus 14% recorded a year ago.

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Mumbai: The Securities and Exchange Board of India (Sebi) has disposed of legal proceedings against Religare Enterprises, its former chairperson Rashmi Saluja and five current and former directors, concluding that no further regulatory directions were warranted after the Burman Group‘s open offer was completed and control of the company changed hands.

The regulator on Friday disposed of the June 19, 2024 interim order-cum-show cause notice without imposing any fresh directions, holding that the remedial objective of the proceedings had already been achieved. Sebi had launched proceedings alleging that Religare and its board failed to cooperate with the mandatory open offer triggered after the Burman Group sought to raise its stake beyond the 25% threshold under the takeover rules.

The regulator alleged that the company violated its takeover code by delaying the process.

Sebi had alleged that REL repeatedly questioned the Burman Group’s ‘fit and proper’ status and refused to apply for approvals from the Reserve Bank of India, IRDAI and the market regulator despite being advised to do so.

The regulator had said the open offer could not progress because the RBI would accept the application only from the target company.

The interim order had directed Religare to facilitate the open offer, seek the necessary regulatory approvals and ensure the constitution of the committee of independent directors.
During the proceedings, several independent directors argued they had relied on representations made by Saluja, whom they alleged later misled them about the Burman Group. They maintained that they were not involved in the company’s day-to-day affairs and had acted on independent legal advice. Saluja, in her defence, contended that the obligation to obtain statutory approvals rested with the acquirers and that REL acted in good faith over governance and ‘fit and proper’ concerns.