Warsh Goes to Wyoming. Will He Bring an Inflation Plan?

For Kevin Warsh, this week brings high stakes in the Grand Tetons, where the world’s business leaders will travel to look for clues about Federal Reserve economic policy.

The Fed chairman is slated to give his inaugural address to the Jackson Hole Economic Policy Symposium, where central bankers, Wall Street power brokers and government officials are hosted annually by the Kansas City Fed.

Quiet, Please

Since the 2008 financial crisis, central banks all over the world have boosted the volume of communications and guidance they issue. It began as a way of managing public expectations around then-unorthodox measures like zero interest-rate policies, allowing officials to explain the logic behind them and keep market anxiety in check.

Since he became Fed chair in May, Warsh has made clear that he believes, with interest rates now well above zero, the central bank should play a quieter role, returning to the more circumspect posture of longtime chair Alan Greenspan. “Financial markets perform best when they react to incoming data,” he said at a June press conference. “Financial markets work less efficiently when they ask a question: How will the Federal Reserve react to that incoming information?”

While Warsh has kept mum on what scenarios could spur the central bank to change intereest-rate policy, Fed watchers and investors still hope he addresses the elephant in the room: inflation. The shocks of the Covid pandemic, global tariffs and the Iran war have kept inflation well above the Fed’s 2% target for years now, with the July CPI reading coming in at 3.4%. Warsh says he wants to tackle the issue, but has given scant details as to how. Last week, the breakeven rates of the five-year and 10-year Treasurys in the bond market hit their highest levels in months, a sign that inflation worries are rising among investors. Some experts say even a morsel of information in his address this week could calm markets:

• “The best thing he can do is give some type of reaction function here,” TD Securities US rates strategist Molly Brooks said on Bloomberg Television, using the term for a guideline a central bank might use to make policy decisions in response to trends such as inflation or growth.
• Markets are currently pricing in a 40% chance of a rate hike next month and a more than 70% chance by the end of the year, according to CME Fedwatch.

Do Not Yield: Analysts at Standard Chartered wrote Friday if Warsh offered clarity around the Fed’s reaction function, it could “ease some monetary policy uncertainty” and, with it, pain in the bond markets. Yields on long-term Treasuries are rising over worries around America’s $40 trillion debt pile and persistent deficits, threatening to make it more expensive for the US government to borrow.