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The Kansas City Fed’s Jackson Hole Economic Policy Symposium on August 27-29 is shaping up to be an important test for Fed Chairman Kevin Warsh, whose rejection of forward guidance has contributed to increased market volatility.
At the July 29 FOMC meeting, Warsh appeared comfortable with allowing markets to tighten financial conditions by raising long bond yields. The 30Y US Treasury yield subsequently climbed from 5.10% to 5.34% on August 18, its highest since mid-2007. Other pressures included the Trump administration’s fiscal deficits and historically large corporate borrowing to finance AI infrastructure.
US Treasury Secretary Scott Bessent’s surprise intervention on August 19 complicated Warsh’s message. Bessent’s announcement to double the size of planned buybacks of long-term bonds to at least USD4 billion per operation initially drove the 30Y yield lower, but the relief proved short-lived as yields subsequently rebounded.
The contrasting approaches of Warsh and Bessent exposed an uncomfortable policy contradiction. The episode risks blurring the institutional boundary between monetary policy and debt management policy, especially if markets perceive the Treasury buybacks as quasi-monetary intervention to suppress long-term yields, or, more importantly, as quantitative easing if the buybacks are not financed by Treasury issuance.
Warsh’s silence over Bessent’s buybacks therefore matters. Without clarification, the market may question whether the Treasury is merely improving market liquidity or increasingly assuming responsibility for financial conditions traditionally associated with the Fed. The USD’s weakness and rallies in bitcoin and gold suggest that investors are increasingly sensitive to this institutional ambiguity.
Jackson Hole, therefore, presents Warsh with a larger communication challenge. Warsh needs to explain how a Fed without forward guidance intends to anchor expectations, how much tightening the Fed is prepared to tolerate through long-term yields, and the policy boundary between the Fed and the Treasury.
The market needs a coherent policy framework. Without one, reduced forward guidance risks becoming less a return to market price discovery and more a source of uncertainty. While Warsh and Bessent need to work together to stabilize financial markets, they must ensure that their efforts do not raise concerns about Fed independence by casting the Treasury as activist and dominant.
Quote of the Day
“Nine-tenths of wisdom is being wise in time.”
Theodore Roosevelt
August 24 in history
In 1932, Amelia Earhart completed the first non-stop solo cross-country flight by a woman, flying from Los Angeles to Newark, New Jersey.
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