Kevin Warsh’s Jackson Hole speech was more hawkish than expected
The Fed Chair suggested progress in bringing down inflation has been too slow, and he believes that monetary policy is not even modestly restrictive now
The Treasury and Secretary Scott Bessent surprised markets with an increase in their buyback program to push long-end yields lower
August is typically quiet for financial markets as participants squeeze in final vacations before school restarts. This year ended with a bang after Fed Chair Kevin Warsh delivered a hawkish Jackson Hole speech on August 28. Warsh’s July FOMC appearance had disappointed: after saying in June that price stability would be achieved, he spent the July press conference focused more on long-run Fed reforms than near-term policy needs. Markets responded with a weaker dollar and higher long-end Treasury yields. At Jackson Hole, Warsh returned to the hawkish tone of his first FOMC meeting, explaining why inflation remains too high and is not improving fast enough. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Otherwise, we have work to do.” He also reiterated that the 2% inflation target is “firm” and “fixed,” leaving little room for debate.
Warsh was also upbeat on the economy, citing robust business investment and “quite high” expectations for cap-ex and earnings growth. He described the labor market as consistent with full employment, suggesting limited concern about softer summer jobs reports. He also noted historically tight credit spreads in corporate debt and leveraged loans. From that backdrop, he concluded policy is not even modestly restrictive, contrary to his predecessor Jerome Powell’s framing. The bond market responded accordingly to the more hawkish tone from Warsh. Exhibit 1 highlights the change in probabilities for rate hikes at the September and December FOMC meetings based on pricing in fed funds futures contracts.
Exhibit 1
Source: CME Group
Bessent’s Buyback
The long end of the Treasury curve has been under pressure for months, driven by inflation, supply/demand technicals, and rising term premiums tied to fiscal deficits and Treasury issuance. Higher oil prices linked to the Iran conflict have added to inflation expectations, while heavy long-term corporate issuance for AI infrastructure has created competing bond supply, much of it hedged by shorting Treasuries. A weaker yen has also contributed to bear steepening pressures on the Treasury curve. Japan is the largest foreign holder of Treasuries, and yen weakness makes domestic yields more attractive to Japanese investors. That dynamic helped prompt the July 31 U.S. intervention to sell euros and buy yen. The move drew headlines but was not especially controversial in financial markets, though it likely needs a Bank of Japan rate hike to have lasting impact.
More controversial was the Treasury Department’s surprise August 19 announcement that it would double long-end Treasury buybacks to $4 billion per weekly operation. The timing was unusual because the quarterly refunding announcement, which includes buyback guidance, had been released only two weeks earlier. Treasury Secretary Scott Bessent then told CNBC the action was intended to lower long-end yields, rather than merely support liquidity in off-the-run issues, saying “we believe that the yields don’t reflect the underlying fundamentals.” In other words, markets were mispricing risk in the secretary’s view. That is a slippery slope, and the timing suggests a political angle as much as a market-function one.
Beyond the criticism of timing and motivation, the effort also appears likely to be futile. Yields initially snapped lower but quickly reversed in the days that followed. At $4 billion a week, the program is akin to bringing a knife to a gunfight. Comparisons to the Fed’s 2011 “Operation Twist” are overstated as well. That program involved purchasing $400 billion of long Treasuries over nine months ($44 billion per month) while selling an equivalent amount of short Treasuries. A material move lower in long-end yields likely requires multiple fundamental catalysts: a resolution to the Iran conflict and smoother oil flows, weaker growth or recession, and—most importantly—a meaningful reduction in the fiscal deficit. Spending cuts look overly hopeful in the current legislative environment, so the more plausible upside case is AI becoming a major catalyst for economic productivity and growth, driving higher government revenues.
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