Carmignac: Who controls the long end at Jackson Hole?
By Kevin Thozet, a member of the investment committee at Carmignac
Federal Reserve Chair Kevin Warsh will deliver the keynote at the Kansas City Fed’s annual Economic Policy Symposium at 4pm Paris time on Friday, 28 August. With no title yet announced - consistent with his reluctance to embrace forward guidance - it remains unclear how he will use his first Jackson Hole speech as Chair.
Warsh said at the July press conference that he had “not made up his mind” about the type of speech he would deliver. By now, however, that decision is likely to have been made. He has signaled that he intends to frame the “big questions” facing the Fed: inflation targets, productivity, demographic change and global economic shocks.
The timing is delicate. His first Jackson Hole comes after a July press conference that left markets uncertain about his stance on inflation and his framework for fighting it. Core PCE is still running at 3.3% year-on-year basis, while markets price around a 40% probability of a 25bp hike in September. While market expectations have moved sharply lower following softer labour-market and inflation data. Against this backdrop, markets will be highly sensitive to any hint about the Fed’s reaction function.
The Treasury adds another layer of complexity. Scott Bessent’s efforts to contain long-term yields involve buybacks in the 10 to 30-year maturities sector while it relies largely on shorter-term borrowing to finance its deficit. Hence the more the Treasury seeks to limit pressure on long-term yields, the more important the level of short-term rates becomes. The interaction between fiscal policy, debt management and monetary policy is therefore becoming increasingly difficult for markets to ignore.
Against this backdrop, we expect Warsh to resist providing explicit guidance in September. The theme of this year’s symposium (Financial Innovation: Implications for Payments and Policy) and the Fed’s five task forces provide ample scope for a broader discussion. Warsh may use the speech to update markets on this work and flesh out some of the deeper themes he has highlighted since taking office.
The key questions for investors are therefore threefold: will Warsh signal that a September hike remains firmly on the table? How will he clarify his approach following the market backlash to his July communication which saw long term bond yields gaining more than +15 bps? And what, if anything, will he say about rising long-term yields and the interaction between monetary and fiscal policy?
Our base case is that Warsh will emphasise inflation vigilance and Fed independence, while avoiding firm rate guidance. Markets are looking for reassurance on both inflation and the bond market, but Warsh’s preference for a less prescriptive communication framework means that reassurance may come through principles rather than policy signals. He is also likely to proceed cautiously on the balance sheet. The recent rise in government bond yields suggests that demand for duration is already under pressure, and any indication of a less accommodative balance-sheet stance could amplify that pressure.
The risk is asymmetric. A hawkish surprise, with explicit concern over inflation or a willingness to hike, would push short term treasury yields higher in a bear flattening move, likewise for the dollar and weigh on equities. A dovish surprise, focused on weakening growth or labour-market risks, would see lower real bond yields, and dollar weakness while equities could fare well as earnings remain strong while rate-induced valuation pressure would abate. A speech offering little guidance, leaving investors unconvinced, would see the pressure on the long end intensify.
