Warsh's Hawkish Tone Misinterpreted by Markets

The recent keynote speech by Kevin Warsh at the Jackson Hole Symposium has been interpreted in two ways. Some see it as a standard monetary policy pivot, while others consider it in the broader context of the US Treasury and Federal Reserve's actions.

According to Brooks, Warsh's previous dovish stance on inflation led to a sharp rise in long-term yields, which the US Treasury had to address with an unusual buyback announcement. This announcement sparked fears that the US was moving towards artificial yield caps, causing unintended consequences.

Brooks believes that yesterday's 'hawkish' keynote speech by Warsh was actually aimed at containing the rise in long-term yields, rather than signaling a shift towards more hikes in the upcoming Fed meetings.

The chart above shows the slope of the US yield curve, which plots the difference between the yield on 30- and 2-year Treasuries. The vertical red lines denote key turning points this year, including the war in Ukraine, the US blockade of Iran, and the most recent Fed meeting.

The speech was successful in anchoring long yields, with the slope almost back to pre-July 29 levels. Markets are currently pricing a 60 percent probability of a 25 basis point hike in September, up from 40 percent prior to the speech. However, Brooks does not think this is what yesterday's speech signaled.