Original Title: Warsh goes to Jackson Hole
Original Author: Financial Times

Editor's Note: Federal Reserve Chairman Kevin Warsh will speak at the Jackson Hole Global Central Bank Annual Meeting on Friday. Currently, inflation in the United States remains above the Federal Reserve's 2% target, and the conflict in Iran alongside high oil prices has increased uncertainty in the inflation outlook, while long-term U.S. Treasury yields are hovering near levels not seen since 2007. The market hopes to confirm from this speech how the Federal Reserve is prepared to handle the increasingly prominent contradictions between inflation, growth, and financial conditions.

The real issue is not just whether Warsh will signal interest rates. Recently, he has emphasized that the Fed should not overly rely on forward guidance while also providing little explanation of his policy framework. Meanwhile, the U.S. Treasury has begun to increase liquidity support for the long-term Treasury market. The interplay between monetary policy, debt management, and the government’s push to lower financing costs is making it more difficult for investors to judge the limits of U.S. policy.

The Financial Times editorial board believes that Warsh needs to use this speech to clarify how he intends to achieve the 2% inflation target, his views on the role of long-term rates in tightening financial conditions, and how he will maintain the Federal Reserve's independence. If these issues continue to lack clear explanations, the market's demand for a "risk premium" due to uncertainty may continue to be reflected in long-term Treasuries, the dollar, and even global financing costs.

Thus, the Jackson Hole speech is not only a policy preview but also an opportunity for Warsh to repair communication with the market. What is worth observing next is not whether he provides an exact path for interest rate cuts, but whether he can propose a coherent, verifiable, and politically uninfluenced policy framework.

Below is the original text translated:

Every late August, nighttime temperatures in western Wyoming begin to drop, and trout in the Snake River gather to feed before winter arrives. The good fishing conditions initially attracted former Federal Reserve Chairman Paul Volcker, who loved fly fishing, and facilitated the long-term location of the Federal Reserve's annual meeting here.

Today, the Jackson Hole Global Central Bank Annual Meeting has become an important venue for central bank officials, finance ministers, and economists to discuss monetary policy. This year, the market's attention will focus on Federal Reserve Chairman Kevin Warsh’s speech on Friday.

Investors hope to find an answer to a core question: in the face of inflationary pressures, rising long-term rates, and fiscal policy intervention in the bond market, what exactly is Warsh prepared to do regarding monetary policy?

Inflation not back on target, while long-term rates have risen to high levels

The policy environment Warsh faces in the coming months is not easy.

The ongoing conflict in Iran continues to disrupt global markets, with oil prices remaining above pre-conflict levels; U.S. inflation also continues to be above the Federal Reserve's 2% target. Meanwhile, U.S. government debt continues to rise, with higher Treasury yields further burdening fiscal interest obligations.

The massive capital expenditure linked to AI infrastructure has also begun to enter discussions about interest rates. The Financial Times editorial board believes that AI investment may increase funding demand, elevate borrowing costs, and create a certain crowding-out effect on other economic sectors. This judgment currently leans more towards structural explanations; the specific impact of AI capital expenditure on long-term rates is still difficult to completely separate from factors like fiscal deficits, inflation expectations, and term premiums.

The Treasury's bond repurchase arrangements further add to the complexity of policy interpretations. On August 19, the U.S. Treasury announced it would raise the one-time liquidity support repurchase scale for nominal coupon Treasury bonds with maturities of 10 to 20 years and 20 to 30 years from a maximum of $2 billion to at least $4 billion, with the new arrangements taking effect on September 9 and continuing until November 4.

This operation is primarily aimed at improving the liquidity of older securities and is not equivalent to the quantitative easing implemented by the Federal Reserve through expanding its balance sheet. However, when long-term yields rise rapidly, the Treasury increasing the scale of long-term Treasury repurchases will still affect the market's judgment on whether the government is paying more attention to long-end financing costs.

Warsh's communication style is generating a "risk premium"

The Financial Times believes that some of the difficulties Warsh faces stem from his own communication style.

Warsh has long opposed the central bank’s excessive reliance on forward guidance, or hinting at future interest rate paths to the market. In his view, overly explicit policy commitments may weaken the central bank's ability to adjust policies flexibly based on economic data.

However, reducing forward guidance does not mean that the market no longer needs to understand the Federal Reserve's policy framework. When investors cannot determine how the central bank weighs inflation, employment, and financial stability, the market typically demands higher risk compensation.

This additional compensation can be understood as a "risk premium": investors demand higher yields to hold long-term bonds because they cannot ascertain the future direction of policy. Its impact is not limited to U.S. Treasuries but may further transmit to housing mortgage loans, corporate financing, and sovereign debt in emerging markets.

According to the Financial Times, Warsh's limited public communication has not allowed investors to fully understand his judgments about the economic situation and policy paths. Under the influence of multiple factors, long-term U.S. Treasury yields have risen to near levels not seen since 2007. It cannot simply be attributed to a lack of communication, but the absence of a clear framework may amplify market concerns about inflation, fiscal policies, and policy independence.

Let long-term rates "replace interest rate hikes," the risk is that policy boundaries become ambiguous

Warsh seems willing to let higher long-term rates take on part of the work of tightening financial conditions.

The rise in long-term yields will push up the costs of housing loans, corporate debt, and other long-term financing, thereby dampening borrowing and demand, which theoretically helps reduce inflationary pressures. In this framework, the Federal Reserve may not need to simultaneously raise short-term policy rates significantly to achieve a certain degree of monetary tightening.

The Financial Times acknowledges that this line of thought has some rationality. But the problem is, if Warsh avoids raising short-term rates while inflation remains above target, and accommodates the Trump administration's preference to lower short-term financing costs, the market may begin to question whether the Federal Reserve's policy decisions are influenced by political considerations.

Central bank independence depends both on institutional arrangements and market perceptions. Even if policies have economic logic, as long as investors believe that the Federal Reserve is cooperating with the government to lower financing costs, long-term U.S. Treasuries and the dollar may also come under pressure due to declining credibility.

The Treasury's recent actions have further amplified such doubts. In addition to increasing liquidity support repurchases for long-term Treasuries, U.S. government officials have also expressed a desire to lower borrowing costs multiple times. Investor Stanley Druckenmiller, who has close ties to Warsh and Treasury Secretary Yellen, has also warned against allowing the Treasury to take on too large a role in market pricing. His core judgment is that when the government tries to lead asset prices away from fundamentals for an extended period, policy interventions are often difficult to sustain.

This does not prove that the Federal Reserve and the Treasury have formed a formal agreement to suppress long-term rates, but the policy directions of the two are beginning to be viewed within the same framework by the market. Monetary policy is responsible for short-end rates, while the Treasury affects Treasury supply and liquidity through its issuance structure and repurchase arrangements, making the boundaries between the two sets of policies increasingly important.

Warsh needs to answer more than just the next interest rate decision

The Jackson Hole speech has historically been an important juncture for the Federal Reserve to adjust its policy narrative. In 2010, then-Federal Reserve Chairman Bernanke signaled further asset purchases at the meeting, paving the way for the subsequent announcement of a second round of quantitative easing.

Warsh has repeatedly pledged to preserve the Federal Reserve's independence and the 2% inflation target, but the Financial Times believes that merely principled statements are not enough. The market needs to know what mechanisms he is prepared to use to achieve those targets and how he will determine policy priorities when inflation, growth, and long-term financing costs come into conflict.

Thus, the most important focal point of Friday's speech is not an isolated signal for a rate hike or cut, but whether Warsh can answer several more fundamental questions: How does the Federal Reserve judge how much long-term rates have tightened? Can higher long-end yields substitute for short-term rate hikes? Will Treasury debt management operations influence monetary policy judgments? In the face of the White House's calls to reduce financing costs, how will the Federal Reserve demonstrate that its decision-making remains independent?

If Warsh can provide a coherent policy framework, the speech may help reduce the market's risk premium due to uncertainty. If he continues to avoid specific mechanisms, investors will still need to speculate on the Federal Reserve's policy response function through economic data, Treasury operations, and political signals.

The so-called policy response function refers to the market's judgment based on the central bank's past actions and public statements regarding what actions the central bank may take when inflation, employment, or financial conditions change. Currently, what the market lacks is not necessarily an accurate interest rate roadmap, but rather a framework sufficient to explain how Warsh makes decisions.

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