Warsh's Jackson Hole Test: Can Fed Persuade Markets on Inflation Target

Federal Reserve Chair Kevin Warsh is set to deliver his first speech at the annual Jackson Hole symposium in Wyoming, amidst rising government borrowing costs and stubbornly high inflation. The event, which gathers central bankers, academics, and policymakers from over 70 countries, has been overshadowed by recent data showing the personal consumption expenditures index rose 0.2% in July, keeping core inflation above the 2% target for a 65th consecutive month.

The Federal Open Market Committee held interest rates at 3.50% to 3.75% in July, but three regional Fed presidents dissented in favor of a quarter-point increase, the most since September 2016. The market has since moved the other way, with CME's FedWatch tool putting the probability of a September hike at around 40%, down from roughly 55% a month ago.

The bond market is under pressure, with yields on 10 and 30-year Treasuries climbing sharply, pushing up borrowing costs across the economy. The US Treasury has announced plans to double buybacks of 10 to 2-30 year bonds, but markets have been unconvinced, with yields rising back above pre-announcement levels.

Warsh's speech on Friday is seen as a test of whether the Fed can persuade markets that 2% remains a genuine destination, and that it has a credible way of getting there. The speech will be closely watched, not only for its implications for monetary policy but also for its impact on global financial conditions.