What Will Kevin Warsh Say?

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Kevin Warsh gives his first keynote at the Jackson Hole Economic Policy Symposium in a few hours. After what’s widely seen as a rough start to his chairmanship - some of which is unfair in my opinion - two things are pretty clear. First, expectations are very high for today. Warsh stands accused of not having shed any light on where he stands on the economy and - more importantly - why the Fed didn’t hike on July 29. The fact that expectations are high is unfortunate because the speech will almost certainly fall short of all the stuff people want to hear. Second, the reason the speech will fall short is because Warsh has painted himself into a corner. He can’t talk about where policy is headed because that’s forward guidance and he’s trying to - rightly - ditch that. He can’t dwell on why the Fed didn’t hike at the last meeting because that’ll sound dovish and risk sparking another Fed “credibility” crisis, with markets pushing long yields up in a replay of what happened after July 29. Finally, he can’t say anything substantive about more medium-term, structural issues, because they’re up to his task forces and he can’t front-run those. So my best guess is that he says nothing, covering that with a veneer of hawkishness made up of thunderous proclamations that price stability is all-important and that the Fed has dropped the ball on this. The risk is therefore that risk markets and - especially - precious metals pull back because they’ll think he’s being hawkish, when really he’s saying nothing because that’s all he can say.

The worst possible outcome for Warsh is that he comes off as dovish. That’s because markets will immediately jump on the “credibility crisis” bandwagon and drive longer-term yields up. That would be a replay of what happened after the Fed meeting on July 29 and after then Chair Powell’s dovish keynote at Jackson Hole a year ago. The chart above shows the slope of the US yield curve - specifically the 30- versus 2-year yield - and how this spiked on both occasions. A resumption of curve steepening would be especially unwelcome given recent efforts by Treasury Secretary Bessent to cap long-term yields. Markets are uniquely focused on the risk that out-of-control fiscal policy ultimately ends in debt monetization, so it’s better to play it safe and sound hawkish.

Which brings me to the debasement trade. The chart above shows the gold price since Jan. 2024. Last year’s Jackson Hole keynote and the most recent Fed meeting sent gold soaring because both were seen as dovish. If there’s now a hawkish-sounding keynote - even if it really says nothing at all - risks are that gold and other precious metals pull back. Such a pullback would be temporary as the underlying driver of the debasement trade - out-of-control fiscal policy - is only likely to get worse before it gets better. So I’m flagging this as a short-term risk. The debasement trade is only just getting going in the grand scheme of things.