This year’s Jackson Hole's focus is financial innovation but markets will be eagerly awaiting for Fed Chair's comments on US inflation outlook & Fed's reaction function. Although Warsh has generally avoided anything resembling forward guidance, including clearly articulating his reaction function, markets might expect him to take a firmer stand at JH. During the July FOMC press conference, Warsh said that his Jackson Hole speech looked like a blank piece of paper and that he hadn't decided whether he would deliver a big-picture speech or talk about "the action we're going to have between September and December." If his speech decides to focus on his views about key longer-run drivers of the economy, such as productivity and demographics and their effects on the economy & completely ignores the inflation outlook & resultant reaction function of Fed, long end yields might get unhinged again as markets might further doubt the inflation fighting credibility of Fed leadership. This might lead to bear steepening in US yield curve. If his speech lays out the possible reaction from Fed on elevated inflation prints in next few months, markets might spare the long end bond yields. This might lead to bear flattening in US yield curve. Our own view is Warsh needs to go the extra mile to convince the markets about his inflation fighting credibility. Post the July meeting, the twist steepening was not a result any Fed chair will have desired. Lately treasury's actions on long end yields show they are concerned about bond yield movements. Both has a same solution. Warsh needs to sound clear & firm on what the Fed reaction might be if inflation does not cool down. However, he will likely need to go further than he did in July. Specifically, he may need to state more clearly that price stability means returning PCE inflation to 2% and emphasize that interest rates remain the Fed's primary tool for achieving that goal rather than one of several available instruments. In short, we expect Warsh to signal that he is prepared to raise rates again if inflation does not continue to moderate. Anything less & long end US bond yields might make new highs post JH along with lower dollar.
