Hi there,
It’s beer and barbecue time for the world’s central bankers at Jackson Hole, and the spotlight is firmly on Kevin Warsh. This was always going to be a moment for Warsh – his first rodeo at the annual symposium as Federal Reserve chair – but the markets and U.S. Treasury have upped the ante.
Warsh’s refusal to say why the Fed kept interest rates unchanged at his last press conference in July triggered a bond market selloff that could deepen if he continues to keep shtum. Bond investors have decided that the Fed's policy interest rate needs to be higher and they want to understand how Warsh and his divided Fed intend to fight inflation.
Anyone looking for clear guidance at Jackson Hole — as in 2022, when then-Fed Chair Jerome Powell said it was behind the curve on inflation — is likely to be disappointed. Warsh has said he doesn’t do forward guidance, plus he’s commissioned five task forces to review the U.S. central bank's operations and needs to wait for them to report back.
Fundamentally, Warsh thinks central bankers talk too much, and he wants bond markets to play a bigger role in setting rates. Higher long-term Treasury yields may already be doing some of the Fed's tightening work by raising borrowing costs across the economy, but U.S. Treasury Secretary Scott Bessent is muddying the waters there with his plan to try to bring them back down.
As Steven Blitz, chief U.S. economist for TS Lombard, wrote ahead of the Jackson Hole conference: "Warsh made a big deal about wanting to hear what markets had to say. Well, the markets spoke and Bessent shut it down.”
Scott’s so-called “Treasury twist” and its impact on the Fed is the topic of this week’s Reuters Econ World podcast. Watch it here.
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