Jackson Hole has long served as a proving ground for Federal Reserve chairs to set market tone beyond a single meeting, and this year's gathering marked Chair Kevin Warsh's most consequential opportunity yet.
His highly anticipated first keynote was delivered with a hawkish tilt, structured around four parts: AI as a macro variable, the evolution of forward guidance, his guiding principles for policy and his current economic assessment.
It was a strong, clear speech that corrects much of the uncertainty around where he wants to take the Fed. We assess where his words carry the greatest potential to move markets over the balance of the year.
The Power of AI
Why it matters: AI is no longer just a market narrative; it's a question the Fed itself is now grappling with directly. How it reshapes productivity, labor demand and capital allocation will shape the growth backdrop investors are pricing for well beyond this cycle.
Our view: This was, to us, the most consequential section of the speech, even if markets focused elsewhere. He described the moment as "a hinge point of history," contrasting it with the 2010s secular-stagnation, global-saving-glut narrative, and arguing that "the potential for substantially higher growth" is now rising. He went further, framing AI as "a new factor of production"—language that elevates it beyond a sector story to a structural shift in how the economy generates output. Our read is that Warsh leans closer to optimism than pessimism on AI, despite flagging genuine uncertainty on labor effects and the distribution of returns. For bond investors, a Fed chair inclined toward AI-as-growth-additive is less likely to treat AI-driven capex, and its effect on real yields, as something requiring a monetary offset.
Inflation Trajectory
Why it matters: Inflation has been the quiet counterweight to this year's hawkish repricing. Core PCE has printed in line, core goods inflation sits at 0%, and shelter disinflation is running at COVID-era lows, giving the Fed room to look past near-term noise.
Our view: Warsh's characterization diverged from our expectation, and inflation emerged as the most important takeaway of the address. He cited PCE inflation at 3.7% over 12 months and 4.1% over six months, with progress described as "modest," largely dismissing recent improvement as insufficient. Disaggregating the PCE basket, he found that 54% of components rose more than 3% over the past year and 49% rose above that level over six months—below post-pandemic peaks but well above the roughly 32% pre-pandemic norm. This breadth argument is more hawkish than our narrower shelter/core-goods narrative. His standard—that inflation must move toward target "clearly and at sufficient speed"—leaves an open question markets will likely debate in coming weeks. Still, his tone left little doubt that he views the broader economy as being in a good spot.
The Hike-Hold-Cut Debate
Why it matters: Following Warsh's first meeting in June, markets re-priced sharply toward two additional Fed hikes, with the probability of a July move rising from 5% to 25%. The divergence across the market was stark: Some banks called for as much as 75bps of hikes, while others expected cuts.
Our view: Warsh gave no explicit signal on the near-term path, though his tone leaned toward hawkish: He called inflation the Fed's "predominant focus right now" and noted that responsibility for "65 months of sustained, elevated inflation sits squarely with the central bank." He also rejected committing to a Taylor rule, calling mechanical rules unreliable and pointing to 2021 forward guidance as having delayed the Fed's inflation response—an implicit critique of the prior regime. Front-end rates moved higher while the long end eased modestly, and September hike odds shifted to roughly 50%. Avoiding a hike would likely now require a significant CPI miss.
Forward Guidance
Why it matters: Warsh had drawn scrutiny for a lack of forward guidance following his first FOMC meeting, acknowledging that "the lack of forward guidance may have influenced market moves; even if we haven't done much, markets have quite a bit." Jackson Hole was his platform to either double down on this ambiguity or begin filling the gap.
Our view: Warsh confirmed our expectation, describing his outline as "a trail map . . . just don't call it forward guidance," explicitly declining to pre-commit to a rate path and breaking from the post-2008 norm. He argued the practice has "overstayed its welcome," warning of a "hall-of-mirrors problem" that raises the odds of policy error. This read as an olive branch: He acknowledged that the practice was appropriate for its time, framing his approach as a commitment to discipline rather than a preemptive decision. He referenced five task forces—including one on AI's impact on jobs—but gave no specifics.
Real Yields and the 3% Threshold
Why it matters: We've argued that 85 – 90% of this year's rise in 10-year yields came from real yields, not inflation expectations, with the 30-year real rate touching 3.0% for the first time since 2002. We frame 3 – 4% as the threshold where real yields begin to bite into growth.
Our view: As expected, Warsh didn't address real yields directly. His remarks reinforced our thesis instead: capex growth near 9% over four quarters (the fastest since 2021), over half tied to the AI buildout, alongside S&P 500 profit growth above 20% and credit spreads near historic lows. This is a growth and capex story, not a monetary one—exactly the dynamic driving real yields higher. We think intermediate rates are broadly anchored around current levels for now, and bond anxiety will likely persist at the long end, not the short end that the Fed controls.
Investment Implications
Going forward, we expect greater emphasis on raw data dependency now that markets can no longer lean on Fed guidance, raising uncertainty and the volatility risk premium around each FOMC meeting. September is now a live meeting, and avoiding a hike would likely require a meaningful downside CPI surprise. Intermediate rates appear anchored for now. None of this should be read as risk-off: Warsh's view of the economy, and of AI's growth potential, is constructive, not alarmist.
What to Watch For
Monday 08/31:
- U.S.: Chicago Purchasing Managers' Index
- Japan: 10-Year JGB Auction
Tuesday 09/01:
- U.S.: ISM Manufacturing Purchasing Managers' Index
- U.S.: ISM Manufacturing Prices
- U.S.: JOLTS Jobs Openings
- Eurozone: Consumer Price Index
- New Zealand: RBNZ Interest Rate Decision
Wednesday 09/02:
- U.S.: ADP Nonfarm Employment Change
- Canada: BoC Interest Rate Decision
Thursday 09/03:
- U.S.: Initial Jobless Claims
- U.S.: Services Purchasing Managers' Index
- U.S.: ISM Non-Manufacturing Purchasing Managers' Index
- U.S.: ISM Non-Manufacturing Prices
Friday 09/04:
- U.S.: Average Hourly Earnings
- U.S.: Nonfarm Payrolls
- U.S.: Unemployment Rate