(Bloomberg) — For one day at least, bond traders got the message they were waiting for as Federal Reserve Chairman Kevin Warsh doubled down on his vow to finally tame inflation that’s outpaced the central bank’s target for five straight years.
The tone of his Jackson Hole, Wyoming, speech wasn’t new. But it was enough to dispel some of the doubts about the new Fed chief that this month helped drive long-dated Treasury yields to a nearly two decade high, pull down the US dollar and send investors rushing for rival havens like gold or Bitcoin.
After Warsh spoke, two-year Treasury yields shot up by 12 basis points to 4.35%, the biggest jump since he struck a similarly hardline posture toward inflation in his first post-meeting press conference in June.
Traders piled into bets that a quarter-point rate hike next month is more likely than not. The dollar rallied, gold dropped and 30-year yields were little changed — all signals that the Fed will act to cool inflation over time and, in so doing, keep long-term borrowing costs under control.
“He came into this speech at Jackson Hole with the intention of rebuilding that credibility,” said Brian Quigley, who heads the US Treasuries team at Vanguard Group Inc. “You look at the market reaction, I think that was very effective.”
Alongside Nvidia Corp.’s earnings, Warsh’s appearance at the annual symposium was this week’s tone-setting event for global markets.
Yields had been steadily heading up ever since the US war on Iran hit the global economy with an energy-price shock earlier this year and the Fed continued to stick with its wait-and-see stance. But after 30-year yields hit the highest levels since 2007, that started raising renewed concerns and exerting a drag on stock prices in the wake of the recent record-setting run.
Last week, Treasury Secretary Scott Bessent made an unusual effort to stop yields from rising by announcing plans to buy back more bonds, which fanned fears that Washington was looking to artificially cap longer-term rates without addressing the inflation and yawning budget deficit that have been pushing them higher.
Warsh also contributed to the market’s selloff. When the Fed held rates steady again in July — despite his hawkish tone a month earlier — long-term bond yields jumped sharply as traders demanded higher payouts in return for the risk of heightened inflation. Some of his comments, including questioning whether the Fed’s preferred price gauge remains the right target, added to doubts about his commitment to price stability.
On Friday, he moved to allay those worries. He made no effort to downplay the inflation figures this week that showed it was running at 3.7%, saying underlying trends haven’t “meaninfully improved.” He said he considers the Fed’s 2% target as “firm and fixed.” And while he has broken from his predecessors’ practice of providing guidance on where rates are heading, he said the Fed needs to ensure that inflation is receeding back to that level “at sufficient speed.”
After his remarks, traders boosted the odds of rate hikes, with swaps showing traders see a more than 50% chance of a quarter-point hike at the Sept. 16 meeting. At least one such move by the end of the year is seen as virtually assured, with two now seen as a strong possibility.
Economists at Barclays changed their Fed calls on Friday, expecting a quarter-point hike in September followed by another increase at the December meeting. The bank previously predicted no increases this year.
“Call it what you want, but this is the exact forward guidance the market was looking for at the July FOMC meeting,” said George Catrambone, head of fixed income at DWS Americas. “He’s going far beyond what was expected, dismissing wage inflation and claiming policy isn’t really restrictive. It’s a pretty big 180 degree turnaround.”
The comments surprised some who had expected an uneventful speech, given that Warsh has been eager not to telegraph the Fed’s next moves. Options based on 10-year note futures had been pricing in a muted market reaction, in a departure from positioning around the Jackson Hole gathering in recent years.
Instead, the jump in two-year Treasury yields was the biggest seen during the event since at least 2010. That rippled across markets, dragging down rate-sensitive tech stocks and Bitcoin, which had benefitted from a revival of the so-called Debasement Trade betting on a weaker US currency.
