Countdown to the "debut" of Jackson Hole: the Federal Reserve's guidance is vague, and long-term U.S. Treasury bonds face further selling risks.

On August 28, Federal Reserve Chair Kevin Warsh will give his first keynote speech since taking office at the annual global central banking conference in Jackson Hole, Wyoming. This is more than just a keynote address for an annual policy seminarit is viewed by Wall Street as a crucial window for Warsh to reshape the credibility of the Federal Reserve. Since taking office in May, Warsh has espoused a philosophy of a "quieter Federal Reserve," deliberately avoiding forward guidance, shortening policy statements, and being vague during two press conferences. The market interprets this as a sign of insufficient resolve to combat inflation, leading to a surge in long-term U.S. Treasury yields to their highest levels in 20 years. Currently, the yield on the 30-year Treasury bond briefly reached 5.34%, the highest level since 2007, while U.S. debt has surpassed $40 trillion for the first time, and inflation has exceeded the 2% target for five consecutive yearsWarsh's silence is becoming an expensive form of noise. As the world's largest AI chip company, Nvidia, is set to announce its earnings this Wednesday, Wall Street has sounded a warning: the risks of Jackson Hole are greater than those of Nvidia's earnings report. Allspring Global Investments executive Ann Miletti bluntly stated that Nvidia's performance is a "single profit anchor," while the speech by Fed Chair Warsh could serve as a "systematic pricing anchor" that might simultaneously shift interest rate expectations, term premiums, dollar liquidity, and the discount rates of global risk assets. Warsh's "Silence Philosophy": The Market is Punishing Uncertainty with Yields Warsh's communication strategy since taking office has been described by former St. Louis Fed President Jim Bullard as "the most significant shift in the Federal Reserve in decades." He eliminated the Federal Reserve's practice of forward guidance that had lasted for over a decade, believing it "reduced policy flexibility and disrupted market signals." However, the market is not buying it. After the July FOMC meeting, Warsh neither provided a detailed analysis of the economic situation nor indicated any potential interest rate paths. Investors interpreted this as a lack of determination to bring inflation back to target, with long-term bond yields subsequently soaring to a 20-year high. Former Philadelphia Fed President Patrick Harker stated, "Warsh must directly address the elephant in the roomthe issue of inflation. He needs to articulate more than just 'we are on it.' That kind of statement is no longer sufficient, and the market will be very disappointed." Bullard's warning was even sharper: "The credibility of the Federal Reserve is at riskthe market is beginning to think the committee doesn't really care about getting inflation down to 2%." He specifically noted that Warsh has not yet clearly stated his willingness to achieve the 2% inflation target through rate hikes, and this silence itself has become a source of market doubt. Goldman Sachs Chief Economist Jan Hatzius issued a warning from the perspective of market volatility: Warsh's ambiguous communication style will exacerbate market volatility surrounding the Fed's future interest rate decisions, and this volatility "does not have any constructive implications for the economy." Goldman estimates that enhanced communication could reduce interest rate volatility by about 10% over the next yearWarsh is moving in the opposite direction. TD Securities U.S. interest rate strategist Molly Brooks warned of a clear "asymmetrical risk" at Jackson Holeif Warsh provides too little information, the market is likely to be disappointed, and even if he offers some indications of reaction functions, the upside potential is limited because the market does not anticipate he will provide sufficient details. Bond Market "Out of Control": 5.33% from 2007 Returns On August 18, the yield on the 30-year U.S. Treasury bond touched 5.334%, reaching its highest level since June 2007just before the outbreak of the global financial crisis. The yield on the 10-year bond rose in tandem to 4.75%, the highest since January 2025. This is not a phenomenon unique to the U.S.the yield on Germany's 10-year bonds surged to 3.261%, the highest since 2011; France's 10-year bond yield exceeded 4% for the first time since 2009. Behind this global bond sell-off are three resonating structural forces: the persistent increase in inflation worries due to the U.S.-Iran conflict, the influx of AI corporate debt competing with government bonds for investors, and the reality that the U.S. fiscal deficit has surpassed $1.8 trillion. Data from the U.S. Treasury on August 19 showed that the cumulative fiscal deficit for the first ten months of fiscal year 2026 had reached $1.799 trillion, already exceeding the total for fiscal year 2025 with two months remaining in the fiscal year. Kathy Bostjancic, Chief Economist at Nationwide Mutual Insurance Company, indicated that factors putting pressure on the market remain, including fiscal concerns, inflation, and uncertainty over how the Federal Reserve will respond. "The fundamental reasons for rising long-term interest rates are still present," she stated. In response to the urgency of the 30-year yield surpassing 5.33%, Treasury Secretary Janet Yellen intervened on August 19: raising the liquidity support repurchase single-transaction cap for 10 to 30-year long-term Treasuries from $2 billion to at least $4 billion. However, the effect of this "fever-reducing injection" lasted less than 24 hourswith the yield on August 20 rising again by 5.7 basis points to 5.251%. The outstanding amount of 20-year and 30-year U.S. Treasuries is approximately $5.5 trillion, and the additional $2 billion single-transaction limit is almost negligible compared to the total sum of hundreds of trillions. PCE Data: A "Preliminary Battle" Before Jackson Hole Before Warsh's speech, the market is set to receive the Fed's favored inflation measure on August 26 (Wednesday)the July Personal Consumption Expenditures (PCE) price index. Economists expect July overall PCE to rise 3.6% year-over-year, slightly down from 3.7% in June; core PCE is expected to remain around 3.3%still well above the Fed's 2% target. Bloomberg Economics pointed out that while inflation shows signs of cooling, oil prices have risen again this month, and the ongoing war in Iran is pushing energy costs higher. If the PCE data exceeds expectations, it would further reinforce the logic for a rate hike in Septembercurrently, CME FedWatch shows a roughly 41% probability of a September hike, and a hike before the end of the year. If the data comes in below expectations, it may provide more space for Warsh's "wait-and-see" strategy. But regardless of the outcome, the fact that inflation has been above target for five consecutive years has put the credibility of the Federal Reserve under unprecedented scrutiny. Former St. Louis Fed President Jim Bullard plainly stated: "The credibility of the Federal Reserve is at riskthe market is beginning to think the committee doesn't really care about getting inflation down to 2%." Three Possible Scenarios at Jackson Hole Warsh has not yet decided whether his speech will address the broader macroeconomic "big picture" or directly provide guidance on the policy path from September to December. Bloomberg Economics predicts that Warsh is more likely to choose the latter"doubling down on his reform agenda to eliminate forward guidance," focusing on describing the "intellectual framework" of Federal Reserve reforms rather than offering specific policy signals. HSBC interest rate strategist Dhiraj Narula indicated this provides Warsh with an opportunity to reassure investors by clarifying his outlook. Narula remarked, "We believe that Chair Warshs views on potential inflationary pressures could perhaps provide some rationale for reducing the term premium associated with uncertainty." However, TD Securities anticipates that Warsh "will not change his consistent manner of discussing the economic outlook," and the market will "look for clues regarding his policy reaction functions and whether he will reaffirm the Federal Reserve's commitment to fighting inflation." Evercore ISI senior economist Casiraghi warned that merely reiterating the strong commitment to "restoring price stability" expressed in June and July press conferences "may already be insufficient." Possible Developments of the Three Scenarios Scenario 1: Ambiguous Path (highest probability). Warsh reaffirms his commitment to price stability but refuses to provide a specific path, with the market viewing the three dissenting votes from the September FOMC as "the only actionable signal." The yield on the 30-year Treasury bond may breach 5.4%, the dollar may weaken, and gold could continue to rise. Scenario 2: Hawkish Signal. Warsh explicitly states his willingness to raise rates to combat inflation, and the probability of a September hike rises significantly from the current approximately 32%. Long-term yields may briefly decline (as the market regains confidence in the Federal Reserve's resolve), but the dollar would strengthen and risk assets would come under pressure. Scenario 3: Dove Turnaround. Warsh suggests that the threshold for rate hikes is very high, leading the market to bet that there will be no further hikes this year. Long-term yields would decline due to expectations of a "Warsh put," the dollar would weaken, and risk assets would reboundbut this would further erode his credibility in fighting inflation.