Original title: Warsh goes to Jackson Hole
Original author: Financial Times
Editor’s note: US Federal Reserve Chair Kevin Warsh will deliver remarks this Friday at the Jackson Hole Global Central Bank Annual Conference. With inflation in the US still above the Fed’s 2% target, the conflict in Iran and high oil prices have added uncertainty to the inflation outlook. Long-term US Treasury yields remain near their highest levels since 2007. Markets are looking for confirmation from his speech about how the Fed intends to address the increasingly pronounced tensions among inflation, growth and financial conditions.
The real issue is not only whether Warsh will send an interest-rate signal. Over the past period, he has stressed that policymakers should not rely too heavily on forward guidance, while providing fewer explanations of his policy framework. Meanwhile, the US Treasury has begun to increase liquidity support for the long-term Treasury market. Monetary policy, debt management, and the government’s demand to lower borrowing costs are all intertwined, making it harder for investors to gauge the boundaries of US policy.
(The Financial Times) editorial board believes that Wosch needs to use this speech to explain how he plans to achieve the 2% inflation target, how he views the role of tightening financial conditions from long-term yields, and how he will maintain the Fed’s independence. If these questions continue to lack clear explanations, the market’s “uncertainty premium” may continue to show up in long-dated U.S. Treasuries, the U.S. dollar, and even global financing costs.
Wosch’s Jackson Hole speech is therefore not only a preview of policy, but also an opportunity for him to repair communications with the market. What is worth watching next is not whether he provides a precise rate-cut path, but whether he can put forward a coherent, testable policy framework that is not dominated by political goals.
Below is a compilation of the original text:
In late August each year, nighttime temperatures begin to drop in western Wyoming, and trout in the Snake River gather to feed intensively ahead of winter. Good fly-fishing conditions initially attracted former Fed Chair Paul Volcker, who loved fly fishing, and those conditions also helped ensure that the Fed’s annual meeting would take root there for the long term.
Nowadays, the Jackson Hole Global Central Bank Conference has become an important platform for central bank officials, finance ministers, and economists around the world to discuss monetary policy. This year, market attention will focus on a speech by Kevin Wosch, Chairman of the U.S. Federal Reserve, on Friday.
Investors hope to find an answer to a core question: in the face of inflation pressure, rising long-term interest rates, and government intervention in the bond market, how exactly is Wosch prepared to formulate monetary policy?
Inflation hasn’t returned to target, while long-term interest rates are already at a high level
The policy environment Wosch will face over the coming months is not an easy one.
The ongoing disruption from the Iran conflict continues to roil global markets, and oil prices remain above their pre-conflict levels. U.S. inflation, meanwhile, remains above the Fed’s 2% target. At the same time, U.S. government debt continues to grow, and higher Treasury yields further increase the burden of fiscal interest.
The massive capital expenditure brought by AI infrastructure investment has also begun to enter the discussion on interest rates. (The Financial Times) editorial board believes that AI investment could increase funding demand, push up borrowing costs, and create a degree of crowding-out effect on other economic sectors. This assessment is currently more of a structural explanation, and the specific impact of AI capital expenditures on long-term interest rates still cannot be fully separated from factors such as fiscal deficits, inflation expectations, and the term premium.
The Treasury’s bond repo arrangements have further increased the complexity of policy interpretation. On August 19, the U.S. Treasury announced that the one-off liquidity-support repo size for on-the-run nominal Treasuries with maturities from 10 to 20 years and from 20 to 30 years would be raised from a maximum of $2 billion to at least $4 billion. The new arrangement will take effect on September 9 and run until November 4.
This operation is mainly used to improve the liquidity of older issues and is not the same as quantitative easing implemented by the Fed through an expanded balance sheet. However, when long-term yields rise rapidly, the Treasury also increases the scale of long-term Treasury repurchase support, which will still affect market judgments about whether the government is paying even more attention to long-end financing costs.
Wosch’s way of communicating is creating an “uncertainty premium”
(The Financial Times) believes that some of the difficulties Wosch faces stem from his own communication style.
Wosch has long opposed the excessive use of forward guidance by central banks—hinting in advance the future interest-rate path to the market. In his view, overly explicit policy commitments may weaken the central bank’s ability to adjust policy flexibly based on economic data.
However, reducing forward guidance does not mean the market no longer needs to understand the Fed’s policy framework. When investors cannot judge how the central bank will weigh inflation, employment, and financial stability, markets typically demand higher risk compensation.
This additional compensation can be understood as an “uncertainty premium”: investors demand a higher yield because they cannot determine the direction of future policy before they are willing to hold long-term bonds. Its impact would not be limited to U.S. Treasuries either, and could further transmit to mortgage rates, corporate financing, and emerging-market sovereign debt.
According to (the Financial Times), Wosch’s limited public communication has not yet allowed investors to fully understand his assessment of the economic outlook and policy path. With multiple factors operating together, long-dated U.S. Treasury yields have risen to near the highest levels since 2007. It is not possible to simply attribute the yield rise to a lack of communication, but the absence of a clear framework may amplify the market’s concerns about inflation, fiscal policy, and policy independence.
“Let long-term rates do the work instead of rate hikes”—the risk is that the policy boundary becomes blurred
Wosch seems willing to let higher long-term interest rates take on part of the job of tightening financial conditions.
Rising long-term yields increase the costs of housing loans, corporate debt, and other forms of long-term financing, thereby restraining borrowing and demand; in theory, this helps to ease inflationary pressure. Under this framework, the Federal Reserve may not need to raise short-term policy rates sharply in tandem to achieve a degree of monetary tightening.
(The Financial Times) acknowledges that this line of thinking has some reasonableness. But the problem is that if Wosch avoids raising short-term rates while inflation is still above target, while catering to the Trump administration’s preference for lowering short-term financing costs, the market may begin to question whether the Fed’s policy decisions are influenced by politics.
Central bank independence depends not only on institutional arrangements, but also on market perceptions. Even if the policy itself has economic logic, as long as investors believe the Fed is working with the government to lower financing costs, long-dated U.S. Treasuries and the U.S. dollar may come under pressure due to declining credibility.
Recent actions by the Treasury have further amplified such concerns. In addition to increasing liquidity support for long-term Treasury repo, U.S. government officials have also repeatedly expressed a desire to reduce borrowing costs. Stanley Druckenmiller, an investor who was closely connected with Wosch and then Treasury Secretary Bescent, also warned against allowing the Treasury to play an overly large role in market pricing. His core judgment is that when the government tries to keep asset prices away from fundamentals for the long term, policy intervention often turns out to be unsustainable.
This cannot prove that the Fed and the Treasury have already formed a formal agreement to suppress long-term yields, but the two sides’ policy directions are increasingly being viewed by the market within the same framework. Monetary policy is responsible for short-term rates, while the Treasury affects the supply and liquidity of Treasuries through issuance structure and repo arrangements; therefore, the boundary between the two sets of policies has become even more important.
What Wosch needs to answer is not just the next rate decision
Wosch’s Jackson Hole speech has historically often been an important turning point in how the Fed adjusts its policy narrative. In 2010, then-Fed Chair Bernanke used the meeting to signal further purchases of assets, paving the way for the subsequent launch of the second round of quantitative easing.
Wosch has repeatedly made verbal commitments to uphold the Fed’s independence and a 2% inflation target, but (the Financial Times) believes that principle-level statements are not enough. The market needs to know what mechanism he plans to use to achieve the goal, and how he will determine policy priorities when inflation, growth, and long-term financing costs come into conflict.
Therefore, the most important thing to watch in Friday’s speech is not whether it signals an isolated rate hike or cut, but whether Wosch can answer several more fundamental questions: How does the Fed judge how tightly long-term interest rates have already been tightened? Can higher yields at the long end substitute for short-term hikes? Will the Treasury’s debt-management operations affect the Fed’s monetary policy judgment? In response to the White House’s demands to lower financing costs, how will the Fed demonstrate that its decision-making remains independent?
If Wosch can deliver a coherent policy framework, his speech may help reduce the market’s uncertainty premium. If he continues to avoid specific mechanisms, investors will still need to infer the Fed’s policy reaction function on their own through economic data, Treasury actions, and political signals.
The so-called policy reaction function refers to the way the market, based on the central bank’s past actions and public statements, judges what the central bank might do when inflation, employment, or financial conditions change. Right now, what the market lacks may not be a precise rate roadmap, but a framework sufficient to explain how Wosch makes decisions.