Wash's Jackson Hole speech preview, what is the market worried about?

Original Title: What Wall Street Thinks Kevin Warsh Will Say at Jackson Hole

Original Author: Stephen Innes

Translation: Peggy

Editor's Note: With Nvidia's earnings behind us, market attention shifts to the final major event of the week: Fed Chair Kevin Warsh's keynote address at the Jackson Hole global central bank symposium. U.S. inflation remains above the 2% target, and three officials at the July FOMC meeting already favored a rate hike, yet Warsh has not clearly stated under what conditions the Fed would re-tighten policy.

What is truly troubling markets is not whether Warsh leans hawkish or dovish, but that the Fed's policy reaction function has become difficult to discern. A policy reaction function refers to how policymakers adjust rates in response to changes in inflation, employment, and financial conditions. Warsh tends to reduce forward guidance, but since the July press conference, long-end Treasury yields and market-based inflation compensation have risen in tandem, suggesting that "saying less" may also increase policy uncertainty.

In this article, Stephen Innes synthesizes views from Goldman Sachs, Deutsche Bank, and Bank of America, concluding that Warsh is likely to focus on AI, productivity, and the longer-term policy framework rather than directly pre-announcing the September rate decision. But markets still want him to address several more specific questions: Is the 2% target explicitly measured by PCE inflation? If inflation remains persistently elevated, is raising rates still the primary tool? Is the rise in long-end yields a necessary tightening of financial conditions, or a policy uncertainty premium that needs to be removed?

These questions matter because Warsh's messaging could influence the entire Treasury yield curve, not just rate expectations for the next meeting. The Treasury has just expanded its long-end bond buybacks. If the Fed can reduce the inflation and policy uncertainty premium, long-end yields may be contained in the short term—but the supply-demand pressures from fiscal deficits, massive funding needs, and AI capital expenditures will not disappear.

The following is a translation of the original article:

After Nvidia's earnings report, markets have turned their attention to the last major event of the week: Fed Chair Kevin Warsh's Jackson Hole keynote address, scheduled for Friday at 10:00 AM New York time.

This year's conference theme is "Financial Innovation: Implications for Payments and Policy," but Warsh may not devote the bulk of his remarks to the payment system. He has previously indicated that the speech could take one of two forms: one being a "big-picture speech" discussing long-term structural issues, and the other being closer to a traditional policy outlook that sets the framework for monetary policy discussions from September through December.

According to Innes, Goldman Sachs' trading desk believes the speech could impact the term premium in the Treasury market. Recent inflation data has improved, reducing the urgency for the Fed to immediately tighten further, and giving Warsh a window to reaffirm his anti-inflation stance while avoiding any direct suggestion of a near-term rate hike.

The problem is that what markets currently lack may not simply be a hawkish or dovish label, but a coherent policy framework for understanding the Fed's next moves.

Two Possible Speech Paths: Discussing AI, or Answering How to Act Before Year-End

Since taking office, Warsh has preferred discussing macro-structural issues over providing explicit short-term rate guidance. If this speech continues that style, the focus could fall on topics such as the Fed's internal working groups, productivity, demographics, and artificial intelligence.

The Fed has already announced the leads, research directions, and expected timelines for multiple special working groups, but their specific mandates, how they will coordinate with the FOMC and Fed staff, when they will deliver conclusions, and how recommendations feed into the policy framework remain unclear. Warsh has said he would review the working groups' progress between the July meeting and the Jackson Hole symposium, but at this stage, there may not yet be enough substance to draw meaningful conclusions.

Compared to the working groups, AI is more likely to be the centerpiece of this speech.

Warsh has previously described AI as one of the most significant changes in the economy, business, and family life during his adult lifetime, emphasizing that it carries both enormous opportunities and risks. He has also suggested that AI could become a significant disinflationary force by boosting productivity and enhancing U.S. competitiveness.

This view could shape how Warsh understands the relationship between economic growth and inflation. If productivity gains allow the economy to grow faster without generating equivalent price pressures, the Fed may not need to tighten merely because demand is strong, as it might have in the past.

But the short-term impact of AI is not exclusively disinflationary. The institutional analysis cited in the original article shows that AI-related demand is also pushing up prices for certain consumer electronics and memory chips, while hyperscaler capital expenditures may continue to support investment demand. Therefore, how Warsh distinguishes between AI's short-term demand shock and its long-term productivity effects may matter more than simply stressing that "AI lowers inflation."

Another possibility is that Warsh uses Jackson Hole to clarify the policy path through year-end. This is also the part markets most want to hear, and the hardest to predict.

What Markets Need Warsh to Clarify Goes Beyond September's Rate Decision

Warsh prefers to reduce forward guidance and rarely articulates his own—or the broader FOMC's—policy reaction function. In his logic, when central banks offer fewer conclusions, markets are forced to price more directly off economic data, and financial conditions can then provide policymakers with more effective signals.

The issue is that when the central bank does not explain how it reads the data, reduced communication can also increase risk premia.

Deutsche Bank believes Warsh needs to address at least three questions this time.

The first concerns the Fed's inflation target and policy tools.

At the July press conference, Warsh did not explicitly commit to PCE inflation as the measure for the 2% target, nor did he clearly state whether rate hikes remain the primary means of further tightening if inflation stays persistently elevated. This has led markets to question whether the Fed will wait for its internal working groups to complete their research before acting.

If Warsh explicitly reaffirms the 2% PCE inflation target and confirms that the policy rate remains the core tool for controlling inflation when necessary, he could eliminate this uncertainty at a relatively low cost.

The second question is how the Fed assesses inflation risks.

The June FOMC minutes outlined two baseline scenarios: if inflation gradually fades, rates can stay on hold and may even decline later; if inflation remains persistently elevated, further tightening may be needed.

Currently, several inflationary forces are moving in different directions. AI-related demand and energy price pressures from Middle East tensions have intensified, tariff impacts may be gradually fading, and recent inflation prints have been relatively mild. Warsh needs to explain how the Fed weighs these conflicting signals, rather than emphasizing only one variable.

The third question concerns financial conditions and long-end rates.

Warsh has previously offered two explanations that seem contradictory but can both hold simultaneously: falling bond yields may reflect growing market confidence in the Fed's ability to control inflation; rising bond yields tighten financial conditions from the market side, which can also reduce the need for further rate hikes.

But this explanation has yet to answer a key 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 unclear Fed communication?

Goldman Sachs' Base Case: Reaffirming the 2% Target Without Pre-Announcing September Action

According to Innes, Goldman Sachs expects Warsh to structure his speech around three themes.

First, reaffirming his and the FOMC's commitment to returning inflation to 2%, possibly clarifying that the target is measured by PCE inflation.

Second, explaining why he favors reduced forward guidance. Warsh may argue that when central banks provide fewer hints about the future rate path, markets can respond more directly to economic data.

Third, discussing productivity, demographics, global shocks, and the long-term impact of AI. AI's potential to lift productivity and create disinflationary pressure may once again be a focal point.

Goldman Sachs expects Warsh to acknowledge the improvement in June and July inflation data, but without explicitly signaling the September rate decision. The bank also projects August core CPI and core PCE month-over-month gains of around 0.2% each; a statistical methodology adjustment scheduled for late September could reduce year-over-year core PCE by at least 0.2 percentage points, though some of that decline may be reversed in subsequent data revisions.

Under this assessment, the U.S. would post three consecutive months of relatively improving inflation data. Goldman therefore believes the biggest inflation impacts from tariffs, oil price shocks, and AI-related demand may already be behind us, and the FOMC is likely to hold rates steady in September and through year-end.

This remains Goldman's base case and does not mean Warsh or the FOMC has locked in a policy path. Officials who supported a hike in July may hold their ground, but as inflation data improves, the majority of committee members—particularly voting members—may lean toward staying put.

Bank of America's August fund manager survey also shows limited market expectations for a clearly dovish pivot from Warsh: 53% of respondents expect a neutral speech, 31% expect a hawkish tilt, and only 7% expect a dovish one.

Why a Slightly Hawkish Tone Could Actually Compress Long-End Risk Premia

Jackson Hole has long been a key venue for Fed chairs to adjust market policy expectations. Powell used the platform multiple times to provide policy guidance; Warsh has been markedly more reticent about his personal policy preferences and his read on current economic conditions.

This difference has already affected market pricing.

According to data cited in the original article, after Warsh's July press conference, the S&P 500 fell 1.5%, the 30-year Treasury yield rose 11 basis points, and the 2-year yield declined about 1 basis point. Equities have since recovered, but the yield curve has continued to "bear steepen"—meaning long-end yields have risen more than short-end—and gold has strengthened notably.

Innes interprets these market moves as investors demanding greater compensation for policy and inflation uncertainty. That said, multiple asset classes were simultaneously affected by a range of factors, so not all of the moves can be attributed solely to Warsh's press conference.

Even so, the divergence between short- and long-end yields reveals a market concern: the issue may not just be whether the Fed will hike, but its ability to control long-term inflation and maintain policy credibility.

In this context, a mildly hawkish tone does not necessarily push the entire yield curve higher. 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, markets may re-price some tightening risk into the short end; at the same time, improved Fed credibility could lower the inflation and policy uncertainty premium embedded in 10- and 30-year yields.

From a market pricing perspective, this combination could manifest as short-end pressure, a flatter yield curve, and a supported dollar, while some of the recent strength in gold, commodities, and crypto assets could be dampened. This is a scenario analysis, not a foregone conclusion.

Conversely, if Warsh continues the ambiguous tone from July, investors may keep demanding greater compensation for long-term inflation and policy uncertainty, leaving long-end yields, gold, and other inflation hedges sensitive.

The Treasury Can Stabilize Trading, But Not Solve Long-End Supply-Demand Issues

Warsh's speech also arrives against a unique backdrop: the U.S. Treasury has just expanded its liquidity-support buyback program for 10- to 30-year bonds. The program can improve liquidity in off-the-run issues and signal that the Treasury is paying closer attention to long-end trading conditions, but it is not equivalent to Fed quantitative easing and does not directly reduce the U.S. government's net funding needs.

Innes believes that if Warsh can lower the inflation uncertainty premium—combined with Treasury Secretary Bessent's long-end buyback program—long-term Treasury yields could be somewhat contained in the near term.

But this combination still cannot address the underlying issues, including the U.S. government's massive funding requirements, persistent fiscal deficits, the potential impact of rising memory chip prices on core PCE, and the enormous capital expenditures hyperscalers are pouring into AI infrastructure.

Therefore, what markets need to watch is not just whether Warsh uses phrases like "inflation remains too high" or "recent data has improved," but whether he can answer three questions: Does the Fed still target a clear 2% PCE inflation rate? If inflation re-accelerates, is the policy rate still the primary response tool? How much of the rise in long-end yields represents necessary financial tightening versus an uncertainty premium from policy, inflation, and fiscal outlooks?

Warsh may not need to deliver the September decision, but he does need to tell markets how the Fed will arrive at its answer.

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