RESOLVING THE LEDGER
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Federal Reserve chairman Kevin Warsh made clear four weeks ago that he wants to use his speech at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, to take on big, lofty ideas, as opposed to the tactical details of what the Fed may do in this year's three remaining policy meetings.
Events have not cooperated.
The big picture: Warsh is under intense pressure to give a clearer message Friday at 10am ET than he has so far on the current inflation landscape, the prospects for near-term interest rate increases and the relationship between the Fed and the Treasury.
Markets are skittish, the Treasury has undertaken controversial interventions in bond and currency markets, and investors have grown restless with Warsh's tendency toward vague, high-altitude rhetoric about his policy approach.
Flashback: Traditionally, the Fed chair uses the Jackson Hole speech to deliver a particularly important and long-range message — a notion that Warsh has endorsed.
"If I could, in the high mountain air in Jackson, Wyoming, I'd like to also frame the big questions," Warsh said at a press conference in late July.
"There is a tendency, especially with the proliferation of meetings and press conferences, to get caught up in the myopic: 'Did you do this by a quarter, or do that?'"
Reality check: It will be hard for him to stay so high-altitude in light of the extraordinary cross-pressures visible in markets since then.
After that July meeting of the Federal Open Market Committee, the bond market sold off, sending long-term rates soaring. Commentators complained that Warsh seemed unwilling to back his promises of price stability with a message of what steps the Fed might take to achieve it.
The U.S. Treasury has twice intervened in global markets, first using a Fed facility to help prop up the Japanese yen and then acting to support the prices of long-term Treasury bonds.
It all raises serious questions about the Fed's willingness to raise interest rates if needed to keep inflation in check and its role in cooperating with the Treasury on future interventions in global bond and currency markets.
What they're saying: "To regain market confidence we think Warsh will have to bluntly state that the FOMC will raise policy rates if inflation as measured by core PCE does not move steadily downwards," Steve Englander and John Davies at Standard Chartered Bank wrote in a note.
Between the lines: Warsh is determined not to offer "forward guidance" about future Fed moves, which is well and good, but economists and traders are thirsting for more concrete engagement with some of the essential debates of this moment.
Does he believe the inflation that has reaccelerated over the course of 2026 is a temporary phenomenon that should be looked through? Or is he open to the idea that the Fed needs to raise interest rates to finally achieve the 2% inflation target to which Warsh has vocally committed — and which the Fed has overshot for going on six consecutive years?
To the extent that he wants to move past the Fed's longstanding policy and communications playbook, what does he intend to replace it with?
And is the Fed willing to cooperate with the Treasury in any further machinations in bond and currency markets, and what are the limits of any cooperation?
Of note: Before becoming chairman, Warsh spoke of crafting a new Treasury-Fed accord, updating the 1951 agreement that clarified the lines of responsibility between the two institutions when it comes to U.S. bond issuance and interest rates.
Now would be an opportune time to start filling in some details on what he has in mind, as the Treasury undertakes more interventionist policies.
The bottom line: With the world's bond markets wobbling, Warsh's credibility is on the line in an early test of his leadership.
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