Warsh's Jackson Hole Speech May Let Long-End Rates Tighten Financial Conditions

Kevin Warsh, Chairman of the Federal Reserve, is set to deliver his first Jackson Hole speech since taking office on August 28. Investors will be watching closely for any hints about future interest rate direction and whether he plans to reduce forward guidance.

According to Michael J. Kramer, author of an article previewing Warsh's speech, the Chairman may be inclined to let long-end rates 'do the Fed's hiking' by allowing them to steepen and tighten financial conditions without actively suppressing them.

The term premium on Treasuries has already begun to rise, with the ACM model estimating it at around 82 basis points. This is below the average of approximately 150 basis points seen before quantitative easing was implemented.

If the term premium reverts to its historical average and combined with a neutral rate slightly above 4%, the 10-year Treasury yield could rise above 5%. However, this calculation relies on two key assumptions: the term premium continues to rise and the long-run neutral rate remains elevated.