Chair Warsh talks bond investors off the cliff

Kevin Warsh’s Jackson Hole speech restored investors’ confidence that the Federal Reserve will prioritize reducing inflation, easing the immediate risk of a bond-market selloff.

• The Fed chair has reduced forward guidance, but used the word “hike” three times in his keynote, which markets interpreted as a signal that rate increases remain possible.
• Treasury Secretary Scott Bessent’s attempt to lower long-term yields through increased bond buybacks briefly pushed the 30-year yield down from a 19-year high, but yields recovered as investors focused on inflation, federal debt, datacenter spending and oil-trade disruption.
• After Warsh said responsibility for 65 months of elevated inflation rests with the central bank, the yield curve flattened, with front-end yields rising and long-end yields falling slightly.
• Fed futures price a greater-than-50% probability of a September rate hike, although Federated Hermes does not expect one and sees only a possible 25-basis-point increase later this year.
• The Fed halted quantitative tightening in late 2025 and bought $40 billion of Treasury bills per month to relieve funding-market pressure, later reducing purchases to $25 billion and then $10 billion before announcing their end in August 2026.

Takeaway: The article sees Warsh’s communication as sufficient to keep inflation expectations contained without an immediate hike, while the end of Treasury-bill purchases supports his objective of a smaller Fed balance sheet and less central-bank influence on markets.