Bond market anxiety raises stakes for Warsh's debut Jackson Hole speech

U.S. Federal Reserve Chairman Kevin Warsh's debut speech at the annual Jackson Hole conference this week, self-advertised as a choice between discussing near-term policy ​or broader principles, has taken on added weight as traders and analysts look for guidance about the recent ‌jump in ​bond yields and for reassurance of his independence from the Trump administration. Warsh has said he wants to wait for recommendations from five task forces established at the start of his tenure this spring before getting too detailed about his plans. But markets have already sped towards a conclusion that the Fed's policy interest rate needs to be higher, with U.S. inflation above the 2% target for more than five years and Warsh's colleagues concerned that if the policy-setting Federal Open Market Committee doesn't hike rates ‌to get inflation back to that level, the central bank's credibility could suffer. Globally, what former Fed Chair and Nobel Economics Prize winner Ben Bernanke deemed a "global savings glut" that kept market interest rates low has evolved into a global savings squeeze with rising government debts, fractured international trade and supply lines, the costs of population aging, and booming private investment in artificial intelligence competing to divvy up the dollars available to invest and lend.

"Both the bond market and the FOMC have clearly decided to wake up" to account for higher inflation and what promises to become "a secular, multi-year uptrend in interest rates," said Adam Posen, president of the Peterson Institute for International Economics. Given the questions Warsh left open after his ‌post-meeting press conference last month, Posen said the Fed chief needed to dwell less on the long-term ideas he wants to pursue and more on how the central bank is evaluating the economy in the here and now along with the implications of recent global market developments. "What he should say is 'I have watched the data, ‌listened to the market as I said I would, listened to the committee, and clearly there is reason to consider a hike in coming months if data does not change,'" Posen said.

TREASURY'S LONG SHADOW Warsh is scheduled to deliver a keynote address on Friday at the Kansas City Fed's annual research symposium in Jackson Hole, Wyoming. The conference, with its global audience and intense media coverage, offers U.S. central bank leaders a high-profile way to set a tone or emphasize a message. Former Fed Chair Jerome Powell, for example, used the venue to unveil a new monetary policy framework, then later for a succinct, attention-grabbing pledge to fight inflation that helped cement market expectations for a series of swift rate hikes. Asked after the July 28-29 meeting about his plans for the speech, Warsh told reporters he had not decided yet, but noted his desire ⁠to "frame the big questions. ​There is a tendency, especially with the proliferation of meetings and press conferences, to get caught ⁠up in the myopic."

But the details matter. After that press conference left key policy questions unaddressed, Warsh was already facing calls to speak more clearly about how he evaluates the risks facing the economy and the Fed's likely reaction to them, topics he has avoided because of his distaste for "forward guidance." Since then, the situation has become even more complicated. The recent jump in U.S. and global bond yields ⁠and Treasury Secretary Scott Bessent's decision to intervene in the market have raised the possibility that Warsh will have to account for a more activist Treasury Department and rising government debt costs — in theory not the Fed's concern unless government financing starts to stumble or Treasury's financing choices start to influence short-term interest rates.

The Fed's key policy tool is an overnight interest rate, and gaps between ​that and short-term government debt rates, if they emerge, could make the central bank's management of rates more difficult. The impact on the value of the dollar, which has been falling over the last month againstother major currencies, could also add to inflation. "We are in a regime where activist Treasury policy is ⁠as material — for good and for bad — as central bank policy. The interaction of the two will be key to the outlook," Krishna Guha, a former top New York Fed official who is now vice chairman of Evercore ISI, wrote last week as he and other analysts assessed rising bond yields.

"Warsh has tried to make the unconventional case that the Fed should stand back and let the market form an unguided yield curve ... while ⁠hinting ​long-end tightening might be preferable to short-end tightening. It is hard to make that case when investors see Bessent as trying to manage the long end," Guha said. 'FINDING HIS FEET' Democrats on the Senate Banking Committee, meanwhile, have asked Warsh to provide details on his communications with President Donald Trump, a move that followed a Wall Street Journal report that the two men have been holding regular calls. While Trump has so far withheld any criticism of Warsh, whom he chose for the top Fed job, for not cutting interest rates, as the president consistently demanded of Powell, Warsh's reluctance to talk about policy has left open questions about both his evaluation of the economy and ⁠whether he is holding back on his view of rate hikes to avoid angering Trump. In the minutes of the July 28-29 meeting, some of Warsh's colleagues worried that waiting to hike rates would require steeper and costlier increases in borrowing costs later, while others worried that the longer inflation remains above 2% the more ⁠likely the public is to lose faith in the Fed's commitment to its target.

The bond market's ⁠behavior may be reflecting those concerns, said Maurice Obstfeld, a former International Monetary Fund chief economist who is now an economics professor at the University of California, Berkeley. "He's clearly finding his feet and operating in a very charged environment," given upcoming U.S. midterm elections that could alter the final half of Trump's second term in the White House and volatile bond markets, Obstfeld said.

"Markets are wondering what's the Fed going to do to address inflation that's persistently above target," he said. "There's certainly the possibility that ‌inflation pressures lead to the need for steeper rate increases ‌down the road, which is why you see some of this action in longer-term yields." The speech this week "is a perfect opportunity to clarify his thinking," Obstfeld said.