Sticky US Inflation, Rising Treasury Yields Put Focus on Warsh at Jackson Hole

Fed and Treasury Diverge on Interest Rates

Speech May Offer Clues on September FOMC

The Federal Reserve’s annual Jackson Hole policy symposium opened on Aug. 27. The market’s main focus is a keynote speech by Fed Chair Kevin Warsh at 8 a.m. on Aug. 28 Korea time, or 11 p.m. on Aug. 27. Investors want answers to the Fed’s rate dilemma as inflation has remained above its 2% target for more than five years while employment and consumer spending have stagnated. They are also watching for Warsh’s views on the US Treasury’s efforts to bring down long-term yields and on differences in thinking between the Treasury and the Fed.

This year’s Jackson Hole theme is “Financial Innovation: Implications for Payments and Policy.” It will be Warsh’s first Jackson Hole keynote since taking office in May. The address has long served as a symbolic stage for Fed chairs to present their policy philosophy and signal the direction of monetary policy.

Warsh faces no shortage of challenges ahead of the speech. The core personal consumption expenditures price index, a key inflation gauge for the Fed, rose 3.3% from a year earlier, staying above target. The Treasury’s intervention in long-term rates has added another complication. Treasury Secretary Scott Bessent is trying to curb the rise in long-term yields through steps including bond buybacks, even as the Fed sees a need to keep financial conditions tight.

In markets, the view is spreading that Warsh needs to do more than signal whether the Fed will raise rates at the September Federal Open Market Committee meeting. Investors want clues to the central bank’s reading of the economy’s underlying problems and its broader response.

One key question is how Warsh assesses the causes of inflation. The Wall Street Journal wrote on Aug. 27 that he needs to explain whether price pressures stem from temporary supply shocks such as the war in the Middle East or from an overheated US economy. Investors also want to hear how inflation can be brought back to 2%.

Another focus is whether Warsh’s view of rising long-term yields has changed. At his July FOMC press conference, he said higher long-term yields could reduce the need for the Fed to raise its benchmark rate further. But the picture changes if yields are rising because of fiscal deficits and increased Treasury issuance. That is also why the Treasury is trying to lower rates through expanded buybacks and other measures.

The increasingly blurred line between fiscal and monetary policy poses a major challenge for Warsh. The Financial Times reported that the Jackson Hole meeting could formalize a new understanding between the Fed and the Treasury.

Financial markets could move sharply depending on Warsh’s remarks at Jackson Hole. The scenario investors see as most likely is that he delivers a hawkish message without committing to a September rate increase. In that case, markets may become more sensitive to Treasury fiscal policy than to the Fed. Another key question is whether he stresses policy coordination with the Treasury or the Fed’s independence.

Also attending the event are Bank of Korea Governor Shin Hyun-song and Jang Yong-seong, a member of the BOK’s Monetary Policy Board. European Central Bank President Christine Lagarde and Bank of Japan Governor Kazuo Ueda will not attend.

Hwang Jung-soo, Wyoming correspondent, hjs@hankyung.com