Fed markets have never really been exciting. For eight years we had Powell at the helm and he was like a rock—stable, unmoved and… boring. His approach was one of stability and communication. Dot plots, forward guidance, Nick Timiraos as Fed whisperer; generally, the post-GFC regime focused on stability above all.
That changed in 2022. Before the Ukraine war the global economy was rather stable, bar COVID—and the pandemic was a demand shock, something the Fed is well equipped to manage through rates. Supply shocks are a different beast. The Fed cannot print oil. Worse, the stable, data-driven approach forced Powell to offer continuous guidance on inflation over which he had little to no influence. Cornered, the previous chairman did the only thing he could—he kicked the can down the road and called inflation transitory.
Warsh’s Fed saw that. He dropped guidance, declined to submit his own dot, and is intentionally vague in his speeches.
Jackson Hole
If you think that Jackson Hole will be any different, think again. The theme of the symposium is “Financial Innovation: Implications for Payments and Policy”. The theme itself gives Warsh the ultimate cover—chances are he won’t mention the monetary policy path at all.
Instead, he can freely talk about AI, stablecoins and his task forces (the bolded three are what I expect him to spend the speech on):
Communications: Mervyn King, Arminio Fraga, Peter Fisher—legitimizing the end of the dot plot and forward guidance.
Balance sheet: Rajan, Stein, Dynan—Warsh’s own smaller-balance-sheet view outsourced to people with academic cover.
Data: Doug McMillon, Raj Chetty, Kevin Murphy—providing cover for bad economic data by suggesting that there’s a need for better, private-market sources.
Productivity and jobs: Marc Andreessen, Chad Jones, Asha Sharma—AI’s impact on productive capacity and monetary policy. This is the doctrinal home of “the economy can run hot without inflation.”
Inflation frameworks: Greg Mankiw, Thomas Sargent, William White—working out a new approach to modeling inflation.
I will be surprised if the speech moves the September hold odds by more than 10 points in either direction. Especially after the two FOMC press conferences we’ve seen, both refusing to provide any guidance and forcing the market to decide itself. The task forces provide an additional cover—Warsh can claim that inflation is a non-issue and that data is not reliable.
So what is the answer to September, if it’s not Jackson Hole?
The Rate
If Warsh is not the one to give us guidance, we need to guide ourselves. Luckily, we have plenty of tells in what the Fed and the Treasury do.
The naive read of the current regime is that they want the market to tell them what to do. Both previous meetings resulted in higher long-term yields and a pure read would indicate that it’s high time for a hike. But we are nowhere near pure.
We are in an energy supply shock and there’s only one way to fix it—partially destroy demand and either wait for the crisis to resolve or build more capacity in the meantime. In our specific case building more capacity is easier said than done. Especially if the Strait of Hormuz opens—then, we would enter oversupply, pushing new projects towards bankruptcy. Additionally, America is directly involved in causing the supply shock.
What is rather happening is a deliberate policy choice—keeping the government borrowing cost relatively low and letting the long end bear the cost of the shock.
The tells are already there: the Fed cut its bill purchases to zero on August 14, Treasury froze coupon sizes and pushes every marginal dollar through bills, and the 2-year hasn’t moved while the 30-year made a twenty-year high. But can the board support it?
The Votes
