Original Title: What Wall Street Thinks Kevin Warsh Will Say at Jackson Hole
Original Author: Stephen Innes
Original Translation: Peggy
Editor's Note: After Nvidia's earnings report, market attention shifts to the last significant event of the week: Federal Reserve Chairman Kevin Warsh will deliver a keynote speech at the Jackson Hole Global Central Bank Annual Meeting. U.S. inflation remains above the 2% target, and during the FOMC meeting in July, three officials advocated for interest rate hikes, but Warsh did not clearly state the conditions under which the Fed would tighten policy again.
What truly troubles the market is not whether Warsh leans hawkish or dovish, but whether the Fed's policy reaction function has become difficult to assess. The so-called policy reaction function refers to how policymakers will adjust interest rates based on changes in inflation, employment, and financial conditions. Warsh tends to reduce forward guidance, but after the July press conference, long-end U.S. Treasury yields and market inflation compensation rose in tandem, indicating that "less talk" could also increase policy uncertainty.
In this piece, Stephen Innes synthesizes views from institutions such as Goldman Sachs, Deutsche Bank, and Bank of America, judging that Warsh may focus on AI, productivity, and long-term policy frameworks rather than directly previewing the September interest rate decision. However, the market still hopes he will address several more specific questions: Is the 2% target clearly defined in terms of PCE inflation? If inflation remains high, is interest rate hiking still the primary tool? Is the rise in long-end yields a necessary monetary condition tightening, or a policy uncertainty premium that needs to be eliminated?
These questions are crucial because Warsh's expressions could influence the U.S. Treasury yield curve, not just the interest rate expectations for the upcoming meeting. The Treasury has just expanded long-end Treasury buybacks; if the Fed can reduce inflation and the policy uncertainty premium, long-end yields may be constrained in the short term; however, the fiscal deficit, massive financing demands, and supply-demand pressures from AI capital expenditure will not disappear as a result.
The following is the original translation:
After Nvidia's earnings report, the market began to shift attention to the last significant event of the week: Federal Reserve Chairman Kevin Warsh will give a keynote speech at Jackson Hole on Friday at 10 AM New York time.
The theme of this year's meeting is "Financial Innovation: Impacts on Payments and Policy," but Warsh may not necessarily focus much on the payment system. He previously indicated that the speech might take two forms: one being a "big picture speech" discussing long-term structural issues, and the other being more traditional forward-looking commentary, setting the framework for monetary policy discussions from September to December.
According to Innes's paraphrase, the Goldman Sachs trading department believes this speech could influence the term premium in the Treasury market. Recent inflation data has improved, reducing the necessity for the Fed to immediately tighten policy further, and giving Warsh a window: he can reaffirm his position against inflation while avoiding direct hints at a recent interest rate hike.
The problem is that the market currently lacks not just a simple hawkish or dovish label, but a framework to understand the Fed's next actions.
Two Paths for the Speech: Discuss AI or Address Actions Before Year-End
Since taking office, Warsh has been more willing to discuss macro-structural issues rather than provide clear short-term interest rate guidance. If this speech continues in this style, the focus may fall on the Fed's internal working groups, productivity, demographics, and AI.
The Fed has already announced the leaders, research directions, and expected timelines for several special working groups, but the specific responsibilities of each group, how they collaborate with the FOMC and Fed staff, when they will submit conclusions, and how related recommendations will enter the policy framework remain unclear. Warsh has stated that he would understand the progress of the working groups between the July meeting and the Jackson Hole annual meeting, but at this stage, it may still be insufficient to form substantial conclusions.
Compared to the working groups, AI is more likely to become the focal point of this speech.
Warsh has previously viewed AI as one of the most significant changes in the economy, business, and household sectors since his adulthood, emphasizing that there are both tremendous opportunities and risks involved. He has also suggested that AI could become a significant downward force on inflation by improving productivity and enhancing U.S. competitiveness.
This perspective may influence Warsh's understanding of the relationship between economic growth and inflation. If productivity improvements allow the economy to grow faster while avoiding equivalent price pressures, the Fed may not need to tighten policy immediately just because of strong demand, as it has in the past.
However, AI's short-term impacts are not solely one-sided in terms of reducing inflation. Judgments from institutions cited in the original text indicate that demand related to AI is also driving up prices for certain consumer electronics and memory, while capital expenditures from hyperscale cloud providers may continue to support investment demand. Therefore, how Warsh distinguishes between the short-term demand shocks of AI and long-term productivity effects may be more important than simply emphasizing "AI lowers inflation."
Another possibility is that Warsh might use Jackson Hole to clarify the policy path before year-end. This is also what the market is more eager to hear, but it is more difficult to predict.
The Market Expects Warsh to Clarify More Than Just Whether to Raise Rates in September
Warsh tends to reduce forward guidance and rarely publicly outlines his or the entire FOMC's policy reaction function. According to his logic, the central bank providing fewer conclusions may force the market to directly adjust pricing based on economic data, with financial conditions then providing more effective signals to policymakers.
The issue is that when the central bank does not explain how to read these data, reducing communication may also increase risk premiums.
Deutsche Bank believes there are at least three questions that Warsh needs to address.
First, the Fed's inflation target and policy tools.
At the July press conference, Warsh did not clearly commit to using PCE inflation as the benchmark for the 2% target, nor did he explain clearly whether interest rate hikes would continue to be the primary means of tightening policy if inflation remains high. This raises doubts in the market about whether the Fed will wait for internal working groups to complete their studies before taking action.
If Warsh clearly reaffirms the 2% PCE inflation target and confirms that the policy rate is still a necessary tool for controlling inflation when needed, he could eliminate this uncertainty at a low cost.
Second, how the Fed assesses inflation risks.
The minutes from the June FOMC meeting presented two basic scenarios: if inflation gradually subsides, rates can remain unchanged and may even decline afterward; if inflation remains high, further tightening of policy may be necessary.
Currently, several forces affecting inflation are developing in different directions. AI-related demand and pressures from energy prices due to the situation in the Middle East have intensified, tariffs' impacts may gradually diminish, and the recently released inflation data has been relatively mild. Warsh needs to explain how the Fed weighs these conflicting signals rather than just emphasizing one variable.
Third, financial conditions and long-end yields.
Warsh has previously offered two seemingly contradictory yet actually compatible explanations: declining bond yields may reflect increased market confidence in the Fed's control over inflation; rising bond yields may tighten financial conditions from the market side, which can similarly reduce the necessity for further hikes.
However, this explanation does not answer a critical question: does the current rise in long-end yields reflect reasonable economic and inflation risks, or does it include an additional uncertainty premium stemming from the Fed's unclear communication?
Goldman Sachs' Baseline Scenario: Reaffirm the 2% Target but Not Signal September Action
According to Innes's paraphrase, Goldman Sachs expects Warsh will focus on three directions in his speech.
First, reaffirm his and the FOMC's commitment to restoring inflation to 2%, and possibly clarify that this target will be measured using PCE inflation.
Second, explain why he tends to reduce forward guidance. Warsh may believe that reducing hints about the future path of interest rates allows the market to react more directly to economic data.
Third, discuss the long-term impacts of productivity, demographics, global shocks, and AI. The potential of AI to enhance productivity and exert downward pressure on inflation may once again become a focal point.
Goldman Sachs expects Warsh will acknowledge that inflation data improved in June and July, but will not clearly hint at the September rate decision. The firm also projects that core CPI and core PCE month-on-month increases for August will be around 0.2%; the statistical method adjustments implemented at the end of September may cause core PCE year-on-year growth to decline by at least 0.2 percentage points, although part of this decrease may be reversed in subsequent data revisions.
According to this judgment, the U.S. will see relatively improved inflation data for three consecutive months. Goldman Sachs thus believes that the maximum impact of tariffs, oil price shocks, and AI-related demand on inflation may have passed, and the FOMC is likely to maintain interest rates unchanged in September and before year-end.
This remains Goldman Sachs' baseline judgment and does not represent that Warsh or the FOMC has determined a policy path. Officials supporting rate hikes in July may continue to hold their original positions, but as inflation data improves, most members, especially the majority of voting members, may be more inclined to remain on hold.
Bank of America's August fund manager survey also shows that the market does not have high expectations for a clear dovish turn from Warsh: 53% of respondents expect the speech to be neutral, 31% expect it to be hawkish, and only 7% expect it to be dovish.
Why a Statement of "Slightly Hawkish" May Instead Lower Long-End Risk Premiums
Jackson Hole has long been an important occasion for the Fed Chairman to adjust market policy expectations. During Powell's tenure, he has frequently used this platform to provide policy guidance, while Warsh has evidently discussed personal policy preferences and assessments of the current economic situation less.
This difference has already affected market pricing.
According to data provided in the original text, after Warsh's July press conference, the S&P 500 index fell 1.5%, while the 30-year Treasury yield rose by 11 basis points, and the 2-year yield declined by about 1 basis point. The stock market gradually recovered afterward, but the yield curve continued to be "bear-steep," with long-end yields rising more than short-end yields, and gold also strengthened noticeably.
Innes interprets these market changes as investors demanding higher compensation for policy and inflation uncertainty. Nevertheless, fluctuations in various asset classes during the same period are influenced by multiple factors, and not all changes can be attributed to Warsh's press conference.
Even so, the differentiation between long and short yields still reveals a market concern: the issue may not only be whether the Fed will raise rates but also their ability to control long-term inflation and maintain policy credibility.
In this context, a moderate hawkish statement may not necessarily push up the entire yield curve simultaneously. If Warsh clearly states that inflation has been above target for too long and that the policy rate remains the primary tool for restoring price stability, the market may reprice some tightening risks into short-end rates; meanwhile, an improvement in the Fed's credibility may also lower the inflation and policy uncertainty premiums included in the yields for 10-year and 30-year bonds.
From a market pricing perspective, this combination may manifest as pressure on the short-end, a flattening yield curve, and support for the dollar, while the recent strength of gold, commodities, and crypto assets may be curtailed. This is a scenario projection, not a certain outcome.
Conversely, if Warsh continues the vague expressions from July, investors may raise their compensation requirements for long-term inflation and policy uncertainty, and long-end yields, gold, and other inflation-hedging assets may remain sensitive.
The Treasury Can Stabilize Trading but Cannot Solve Long-Dated Supply-Demand Issues
Warsh's speech is also set against a unique backdrop: the U.S. Treasury has just expanded liquidity support repurchases for 10-year to 30-year Treasury bonds. This arrangement can improve the liquidity of older bonds and signal to the market the Treasury's increased focus on long-end trading conditions, but it does not equate to Fed quantitative easing, nor will it directly reduce the U.S. government's net financing needs.
Innes believes that if Warsh can reduce the inflation uncertainty premium, combined with Treasury Secretary Yellen's long-end repurchase arrangement, long-term U.S. Treasury yields may be constrained in the short term.
However, this combination still cannot solve underlying issues, including the massive financing needs of the U.S. government, the ongoing fiscal deficit, the potential impact of rising memory prices on core PCE, and the significant capital expenditure investments by hyperscale cloud providers for AI infrastructure.
Therefore, the market should not only observe whether Warsh uses terms like "inflation is still too high" or "recent data improvement," but also whether he can answer three questions: Does the Fed still clearly use PCE inflation as its 2% target? If inflation rises again, is the policy rate still the primary tool for response? To what extent does the rise in long-end yields constitute necessary monetary condition tightening, and how much comes from uncertainty premiums related to policy, inflation, and fiscal outlook?
Warsh may not need to provide an answer to the September decision, but he needs to inform the market how the Fed will derive its answers.
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