JACKSON, Wyoming — Federal Reserve Chair Kevin Warsh will take the stage at the Jackson Hole Economic Policy Symposium on Friday facing an unusually demanding audience: investors, economists and fellow policymakers seeking a clearer account of how the U.S. central bank plans to return inflation to 2% while Treasury yields remain elevated.
Warsh’s first keynote address at the annual Kansas City Fed gathering comes after months in which he has offered little direct guidance on the likely path of interest rates. That approach has left markets uncertain about whether the Fed is more likely to keep rates steady, raise them again or allow higher bond yields to do some of the central bank’s work.
The stakes are high. Inflation remains above the Fed’s 2% target, long-term borrowing costs recently reached near two-decade highs, and futures markets have increased the odds of a rate hike at the Federal Open Market Committee’s September meeting.
At its July meeting, the Fed held its benchmark federal funds rate at a range of 3.50% to 3.75%. The vote was 9-3, with three regional Federal Reserve presidents dissenting in favor of a quarter-percentage-point increase.
Warsh is scheduled to speak at 10 a.m. Eastern time Friday, Aug. 28, at the three-day symposium hosted by the Federal Reserve Bank of Kansas City. The event, held annually in Grand Teton National Park, has often been used by Fed chairs to signal changes in monetary-policy thinking.
Whether Warsh follows that tradition may determine how sharply markets move.
Markets want a roadmap
Investors are not necessarily asking Warsh to promise a specific rate decision. They are asking for something more basic: a clear explanation of the Federal Reserve’s reaction function.
That means how the Fed will respond if inflation remains above target, economic growth stays resilient, labor markets weaken or Treasury yields continue to rise.
Warsh has deliberately moved away from the detailed forward guidance that became common under prior Fed chairs. His argument is that policymakers should retain flexibility and that investors should pay closer attention to market signals rather than rely on the Fed to telegraph every move.
The approach has advantages. It reduces the risk that the Fed locks itself into a policy path before new data arrives. It can also prevent markets from treating the central bank’s forecasts as promises.
But it has created uncertainty.
A CNBC survey found that 80% of respondents believed Warsh should provide more insight into his economic views. Forty-five percent expected him to continue avoiding guidance on the rate outlook in his Jackson Hole speech.
“Any clarification of his reaction function would allow Warsh to calm investors,” TD Securities analysts wrote, according to Investopedia. But the analysts said the risk of disappointment was high because Warsh is unlikely to return to the explicit forward-guidance model used by some predecessors.
The question for markets is not simply whether rates go up in September. It is whether Warsh can explain the conditions that would make a hike, a pause or eventual rate cuts appropriate.
Inflation remains above target
Warsh has said the Fed’s goal remains a 2% inflation rate.
“There is no soft inflation target,” he has said. “There’s only a target, and it’s 2%.”
That commitment is important because inflation has remained above the Fed’s preferred level despite earlier policy tightening.
Investors are trying to determine whether Warsh views elevated inflation as temporary, caused by one-time shocks such as tariffs, energy costs or geopolitical conflict, or as evidence that the broader economy is still running too hot.
The answer has direct implications for rates.
If inflation is viewed as largely temporary, the Fed may be more willing to hold rates steady and wait for price pressures to fade. If inflation is seen as persistent, policymakers may conclude that further tightening is necessary.
The FOMC’s July decision revealed a split within the central bank. The 9-3 vote to keep rates unchanged included the largest number of dissents in favor of a rate increase since September 2016.
That division suggests officials are not united on the correct response to current conditions.
Some policymakers appear concerned that inflation could become entrenched if the Fed does not act more forcefully. Others may believe that the existing level of rates, combined with higher long-term yields, is already restrictive enough.
Warsh’s speech could reveal where he stands between those camps.
Treasury yields complicate the decision
Long-term Treasury yields have become a central issue for the Fed.
When Treasury yields rise, borrowing costs increase across the economy. Mortgage rates, corporate borrowing costs, auto loans and other forms of credit often move in response to long-term government bond yields.
Higher yields can slow economic activity without the Fed raising its short-term policy rate.
Warsh has suggested that rising Treasury yields could tighten financial conditions and reduce pressure on the Fed to raise rates even if inflation remains above target.
That idea has unsettled some investors.
The central bank usually focuses on the federal funds rate, its main policy tool. But if policymakers increasingly rely on the bond market to do the work of tightening, investors need to understand how the Fed interprets rising yields.
Are higher yields a sign that policy is becoming more restrictive? Or are they a warning that investors are demanding more compensation for inflation risk, fiscal deficits or uncertainty about the Fed’s credibility?
Those are very different interpretations.
If yields are rising because markets expect persistent inflation, relying on them as a substitute for rate hikes could be risky. It could allow inflation expectations to rise further.
If yields are rising because investors expect stronger growth or larger government borrowing, the Fed may face a different set of challenges.
Reuters reported that investors want Warsh to explain more fully what role the bond market plays in his strategy for returning inflation to 2%.
That may be the most important question of the symposium.
A bond market under pressure
The Jackson Hole meeting comes after a period of stress in bond markets.
Long-term U.S. borrowing costs hit a near-two-decade high last week, CNBC reported.
High yields create pressure not only on households and businesses but also on the federal government, which must pay more to finance its debt.
Treasury Secretary Scott Bessent has already taken steps in the bond market, according to Euronews, adding another layer of complexity to the relationship between fiscal policy and the Fed’s inflation fight.
The Federal Reserve is independent from the Treasury Department. But the two institutions operate in the same financial system.
Government borrowing affects the supply of Treasury bonds. Investor demand affects yields. Higher yields influence financial conditions. And financial conditions influence the Fed’s decisions on inflation and employment.
Warsh will need to navigate this landscape without appearing to make the Fed responsible for managing the government’s financing costs.
Any suggestion that the central bank is avoiding rate hikes mainly to protect the Treasury market could undermine confidence in its independence.
At the same time, ignoring the effects of higher yields on households, businesses and the economy would be unrealistic.
Investors will listen closely for how Warsh balances those concerns.
What futures markets are pricing
Futures markets have increased the perceived likelihood of another rate hike.
CME FedWatch data cited by Reuters showed a 40% probability of a rate increase at the Fed’s next meeting, up from 33% a week earlier.
Other estimates varied depending on the timing of market data. Fox Business cited a 45% chance of a rate hike by the December meeting and a 27.3% chance of rates remaining unchanged through year-end.
The variation itself illustrates market uncertainty.
The Fed’s next policy meeting is scheduled for Sept. 16. A rate increase is not the clear market consensus, but it is a serious possibility.
For the next year, economists are divided. In CNBC’s Fed Survey, 53% of respondents expected rate hikes, 30% expected cuts and 16% expected no change.
That range is unusually wide for a near-term monetary-policy outlook.
It reflects uncertainty about inflation, growth, fiscal policy, long-term yields and Warsh’s own decision-making framework.
A speech that clarifies even one of those issues could move bond yields, the dollar, equity markets and rate futures.
Jackson Hole’s historical importance
The Jackson Hole Economic Policy Symposium is one of the most closely watched annual events in global finance.
Hosted by the Kansas City Fed, it brings together central bankers, finance ministers, economists and academics from around the world.
The event has gained influence because Fed chairs have often used it to outline major shifts in policy or economic thinking.
In 2010, then-Fed Chair Ben Bernanke used the conference to signal the possibility of additional bond purchases, a move that became known as quantitative easing.
In 2020, Jerome Powell used Jackson Hole to announce a new framework that allowed inflation to run moderately above 2% for some time after periods of undershooting the target.
Warsh’s debut does not have to match those landmark moments to matter.
The current policy environment is different. The Fed is not confronting a financial crisis or a pandemic shock. It is trying to finish an inflation fight without unnecessarily damaging growth or employment.
But the communication challenge is just as significant.
Warsh has inherited a central bank in which markets are accustomed to detailed press conferences, economic projections and policy signals. His quieter approach is a departure.
Jackson Hole gives him a chance to explain not only his views on interest rates but also how he intends to lead the institution.
The communication dilemma
Central-bank communication is a balancing act.
Too much forward guidance can make the Fed seem inflexible. If policymakers strongly signal one course and later change it, markets may interpret the shift as a loss of credibility.
Too little guidance can create volatility. Investors may overreact to economic data, guessing about how the Fed will respond.
Warsh appears to favor more discretion.
He has said that he does not want to forecast what the Fed will do, and economists have said they are hoping he will at least offer clues about how he thinks.
The approach reflects a view that markets should not become dependent on central-bank promises.
But in practice, markets still need a framework. Investors, businesses and households make decisions based on expectations about borrowing costs.
A company deciding whether to build a factory, a family considering a home purchase and a bank setting loan rates all need some sense of where financial conditions may be headed.
Warsh’s test at Jackson Hole is whether he can provide that framework without committing the Fed to a specific action.
He may do so by emphasizing the 2% target, explaining how the Fed evaluates higher long-term yields, describing the data he considers most important or defining the conditions that would constitute “persistent” inflation.
Even without a direct rate forecast, those details could give markets more clarity.
The international dimension
Warsh’s speech will also be watched abroad.
U.S. interest rates affect global markets because the dollar and Treasury securities play central roles in international finance.
Higher U.S. rates can strengthen the dollar, raise borrowing costs for emerging-market governments and pull capital toward American assets. Lower rates can have the opposite effect.
Central bankers from Europe, Asia and emerging markets will be listening for signs of whether the Fed sees U.S. inflation as a domestic issue or a risk to global financial stability.
The European Central Bank’s Isabel Schnabel is also expected to attend the symposium, underscoring the international attention on inflation and rates.
Global markets are particularly sensitive to changes in U.S. rate expectations when bond yields are high and economic growth is uncertain.
A hawkish message from Warsh could push yields and the dollar higher. A more cautious tone could ease those pressures, though it might also raise questions about the Fed’s commitment to inflation control.
What to watch Friday
Investors will look for answers to several questions:
- Does Warsh reaffirm a firm 2% inflation target?
- Does he describe current inflation as temporary or persistent?
- Does he see higher Treasury yields as a substitute for additional Fed tightening?
- Does he explain why the Fed held rates steady in July despite three dissenting votes for a hike?
- Does he offer any indication of what would trigger action in September?
- Does he signal a change in his limited-communication approach?
- Does he address the relationship between fiscal policy, Treasury issuance and monetary policy?
The most important outcome may not be a prediction about the next rate decision.
It may be whether Warsh leaves markets with a better understanding of how he thinks.
Investors are not demanding certainty. The economy is too unpredictable for that.
But they are looking for evidence that the Fed has a coherent strategy for bringing inflation back to target, managing the effect of higher bond yields and preserving credibility in a period of unusual uncertainty.
Warsh’s first Jackson Hole speech will be his clearest opportunity yet to provide it.