WYOMING — Global financial markets are swinging again after a string of assessments that Federal Reserve Chair Kevin Warsh delivered his clearest hawkish message since taking office at the Jackson Hole economic policy symposium. Analysts are already flagging the possibility of a collision with President Donald Trump, who is demanding rate cuts ahead of the U.S. midterm elections on November 3. How long the Jackson Hole fallout persists could shift both short- and long-term Treasury yields and expectations for monetary policy at the Federal Open Market Committee meeting on the 15th and 16th of next month. Wall Street will focus this week on the August employment report due on the 4th of next month, given its bearing on the rate decision. Warsh described the labor market as stable at Jackson Hole, and the report offers a chance to verify that assessment. The Fed's Beige Book on the 2nd and Broadcom's fiscal third-quarter results, covering May through July, are also seen as items to watch for clues on the rate path and the state of the artificial intelligence industry.
Foreign media call Warsh's message clearly hawkish; Trump pressure looms before elections
Major foreign outlets including Reuters and The Wall Street Journal said on the 29th that Warsh, in his keynote address at Jackson Hole on the 28th, broke his silence and laid out his monetary policy stance with relative clarity. They noted above all that Warsh made a clear judgment that inflation is a more serious problem than employment, and identified the policy rate as the main tool to address it. His statement that the Fed will do its job if underlying inflation does not move toward the central bank's 2% target at a sufficient pace was read as leaving a rate increase on the table. The Journal said Warsh made his strongest declaration yet of resolve to curb inflation and explained clearly how the Fed should achieve that goal.
In the Treasury market on the 28th, the day of Warsh's speech, the two-year yield, which is sensitive to monetary policy, jumped as high as 4.35% during the session, a one-month high. The 10-year yield, the global bond benchmark, also rose to 4.72%. Unlike shorter maturities, the 30-year yield held steady around 5.20%. That divergence signals the market put that much trust in the prospect of near-term rate increases and in Warsh's commitment to controlling inflation over the long run. As yields on dollar-denominated bonds climbed, the dollar index, which tracks the currency against six major peers, rose 0.55% to 99.7.
Markets have gone further, beginning to price in the possibility that Warsh could lead a rate increase as soon as the September FOMC meeting. According to CME Group's FedWatch, the federal funds futures market on the 29th lowered the probability of a rate increase at the FOMC meeting on the 15th and 16th of next month to 43.0% from 64.6% on the 27th. The odds of a hold rose sharply to 57.0% from 35.4%. The probability that the Fed holds rates steady through the rest of the year plunged to 11.1% from 25.9%, while the chance of an increase surged to 88.9% from 74.1%. The odds of at least a 0.50 percentage point increase this year rose to 50.5%.
Wall Street and beyond, however, see Warsh as potentially reluctant to raise rates before the November midterms out of deference to Trump's wishes. Treasury Secretary Scott Bessent has in recent weeks rolled out extraordinary measures in succession — buying yen and expanding Treasury buybacks — to head off a sharp rise in long-dated yields that would strain the national debt. On the 27th, Bessent sent a letter to Democratic Senator Elizabeth Warren, who had asked for the legal basis for the Treasury's use of the Exchange Stabilization Fund to buy yen, arguing that a disorderly yen market could ultimately raise borrowing costs for American households and businesses. That amounted to an open acknowledgment that the Treasury's intent in supporting the yen was to restrain U.S. Treasury yields. It is why forecasts are gaining traction that a Fed rate increase running counter to Trump administration policy would make conflict with the White House hard to avoid.
Kenneth Rogoff, a professor of economics at Harvard University, told the U.S. political outlet Politico on the 29th that changing interest rates before an election is always difficult, because one side — Republicans or Democrats — will blame the decision-maker for years over that call. The Financial Times also said Warsh could hand Trump the rate increase he least wants just weeks before the November midterms, and that he could set the Fed on a collision course with the president.
BOK Governor Shin Hyun-song: Fed shows commitment on inflation, room for won to strengthen
Bank of Korea Governor Shin Hyun-song also drew attention by attending this year's Jackson Hole meeting. It was the first time a BOK governor had attended in four years, since former Governor Rhee Chang-yong in 2022. Having attended every year while at the Bank for International Settlements, Shin was recognized on sight by a fair number of global figures during the gathering. With this year's theme being financial innovation and its implications for payments and policy, interest ran high in Project Han River, the BOK's digital currency experiment.
Meeting with reporters on the 28th at the Jackson Lake Lodge in Grand Teton National Park, the venue of the symposium, Shin attached significant weight to Warsh's speech earlier that day. "In his Jackson Hole speech, Warsh built out the logic that inflation is far above the 2% target and has persisted too long, that the Fed's tool is the policy rate, and that the Fed therefore has work to do," Shin said. "The message was that markets will be left to work but the central bank will also play its role, which is completely different from the July FOMC press conference." The assessment suggested the FOMC meeting on the 15th and 16th of next month has become considerably more important. Shin noted that because Jackson Hole is fundamentally a gathering of central bank governors, Bessent's Treasury buyback policy, which has recently drawn controversy, did not come up.
Shin also said his own relationship with Warsh had a bearing on the chair's decision to scrap forward guidance. "Back when the 10-year Treasury yield was below 1%, the stock market fell only on days the Fed announced its monetary policy outlook and was unaffected on other days," he said. "I have spoken often with Warsh this year about his reticence, and in this speech he cited my paper arguing that two-way communication between central banks and markets matters."
Shin, who joined the Jackson Hole meeting immediately after the BOK's Monetary Policy Board raised the base rate to 3.00% from 2.75% in Korea on the 27th, expressed confidence in the narrowed Korea-U.S. rate gap's effect in stabilizing the won-dollar exchange rate. Stressing repeatedly that the BOK is paying particular attention to anchoring the foreign exchange market, Shin said he sees room for the won-dollar rate to fall further. In the Seoul foreign exchange market on the 28th, the won-dollar rate closed at 1,372.5 won, the lowest in 13 months since 1,367.2 won on July 24 of last year.
Shin cited SK hynix's listing of American depositary receipts and increased dollar selling by exporters, alongside central bank efforts, as short-term factors behind the recent stability in the won-dollar rate. "The exchange rate is a very important variable in that it encompasses every indicator, including confidence in the Korean economy," Shin said. "We are now quite well prepared for any kind of shock."
Shin went further, asserting that the up to $20 billion a year Korea has agreed to invest in the United States will also not affect the exchange rate. "The Korea-U.S. trade agreement's commitment to invest up to $20 billion means we can do less than that, or none of it, if our circumstances do not allow," he said. "Foreign exchange reserves stood at $427 billion as of last month, so it is well within what we can handle."
August jobs report to gauge labor market optimism; Broadcom, top custom AI chip designer, reports on the 2nd
Even so, Shin drew a line, saying the Monetary Policy Board would not mechanically follow the Fed even if it begins raising rates in earnest in the second half. "Just because the United States raises rates does not mean we must raise ours," he said. "Of course, if the United States keeps raising rates, monetary policy conditions change and we would have to make a fresh judgment then, but we will not simply follow along to match the rate gap." On Warsh's abolition of forward guidance, Shin said he understood the rationale, but offered a different view on Korea's dot plot, introduced not long ago. "I am not that negative on the K dot plot," he said. "We will assess it comprehensively with the Monetary Policy Board members a year from now."
With attention this week fixed on U.S. Treasury yields in the aftershocks of Jackson Hole, various employment indicators are expected to draw market interest. Because Warsh has assessed the current U.S. labor market optimistically, the data are likely to serve as a check on that view. Unless the numbers are bad enough to overturn expectations entirely, the case for tightening could gain momentum. In his keynote address on the 28th, Warsh said the labor market is quite stable, that the unemployment rate of 4.1% remains low by historical standards and has not changed much for several years. He added that jobless claims, a powerful real-time indicator, are near their lowest level in decades, and that he believes the labor market is currently consistent with full employment.
The indicator drawing the most market attention this week is the August nonfarm payrolls report due on the 4th of next month. The market expects nonfarm employment to have risen by 45,000 from July, a rebound from a decline of 23,000 the previous month. The unemployment rate is forecast at 4.2%, up 0.1 percentage point from the prior month. Separately, the Labor Department's Job Openings and Labor Turnover Survey is due on the 1st, and a report from private payroll processor Automatic Data Processing follows on the 2nd.
The Fed's Beige Book will also be released on the 2nd. The Beige Book is a survey of economic conditions compiled by the 12 regional Federal Reserve banks, which contact banks, businesses and experts in their districts to gather recent trends. It is typically published two weeks before an FOMC meeting. The Institute for Supply Management's manufacturing and services purchasing managers' indexes are due on the 1st and 3rd, gauges of private-sector activity in the United States.
Among corporate results, Broadcom's third-quarter performance, due after the close on the 2nd, is the key event. Broadcom is the world's largest fabless designer of custom AI chips, working with partners including Google, Facebook parent Meta and OpenAI, the developer of ChatGPT. Its results will help determine whether the upbeat outlook Nvidia issued on the 26th reflects a trend across the AI industry.
Assessments of the Fed's tightening message are likely to continue this week, centered on the equity and bond markets. Even with rate expectations reversed, uncertainty remains high, with the odds of a September hold still above 40%. Worth watching in particular is whether the White House, pressed for time before the midterms, applies fresh pressure on the Fed. The growth trajectory of the AI industry and the situation in the Middle East war remain major variables for equities.
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