Washington (CNN) — Federal Reserve Chairman Kevin Warsh is set to deliver his biggest speech yet on Friday, but investors may not hear what they want.
Central bankers, finance ministers and policymakers from around the world will gather at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming, on Friday. For more than two decades, the Fed’s sitting leader has signaled where interest rates are heading in the event’s keynote address.
But Warsh is expected to break from tradition — a move that might not sit well with investors.
Since becoming chairman three months ago, Warsh has stopped spoon-feeding Wall Street clues on what the US central bank will do next. Meanwhile, inflation has moved higher and some of Warsh’s colleagues are already calling to raise borrowing costs for the first time since July 2023.
If Warsh sticks to his guns and stays mum about interest rates on Friday, that will make it brutally clear to investors that they will simply have to live with less guidance.
“I don’t expect any signals to come out of Kevin Warsh’s Jackson Hole speech,” said Jan Groen, chief US economist at global financial firm Societe Generale. “And if I’m right, I think the market is not going to like it.”
Shortly after Warsh’s post-meeting news conference last month — in which he stayed quiet about interest rates — long-term bond yields surged in a potential sign that traders are concerned the Fed won’t do enough to tame stubbornly elevated inflation.
Rising government deficits and the increased supply of corporate bonds, among other factors, have pushed up bond yields in recent months. That means the federal government will continue to make massive interest payments that will only add to its $40 trillion pile of debt.
Guessing Warsh’s ‘reaction function’
Warsh hasn’t even discussed what would move the needle for him on interest rates, a concept known as a “reaction function.”
A reaction function is when a central bank explains “what it is watching, how it interprets the economy, how it weighs competing risks, and what developments would change its judgment,” the Brookings Institution explained in an analysis last month. Warsh has repeatedly refused to describe his reaction function when asked by reporters.
This is different from “forward guidance,” which is a more explicit projection of the path for the Fed’s interest rate if the economy evolves as expected.
At a July event in Sintra, Portugal, Warsh said that the bond market is able to “actually understand quite well” without a reaction function. Some disagree with that characterization.
“The bond market is really looking to the Fed for clues on their reaction function,” said Ian Kresnak, senior investment strategist at Vanguard. “What’s driving a lot of the volatility in the rates market is uncertainty around how the Fed is going to respond to inflation.”
A CNBC survey of 31 economists, strategists and investors this week showed that 80% respondents said Warsh should explain his economic views in more detail. Investors view the Jackson Hole event as Warsh’s best opportunity to do just that.
“The symposium gives him room to lay out his personal views,” investors at financial firm Glenmede wrote in an August 24 analyst note. They added that the revelation of Warsh’s reaction function “could reduce some of the uncertainty driving recent volatility in bond markets.”
Fed officials are grappling with the current uptick in inflation, driven by tariffs, war and companies’ massive spending on AI infrastructure on prices — and whether they should step in with interest rate hikes soon.
Investors currently see a roughly 34% chance Fed officials will raise rates at their September 15-16 meeting, according to CME FedWatch. But those odds are higher in subsequent meetings.
“It’s a close call whether or not they hike at all this year,” said Jim Caron, chief investment officer of portfolio solutions at Morgan Stanley Wealth Management.
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