Federal Reserve Chair Kevin Warsh is due to deliver a keynote address at the Jackson Hole global central banking symposium on Aug. 28, his first appearance at the event since becoming chair. Investors are not only listening for hints on the next move in interest rates. They are also watching to see whether he sticks with a reduced reliance on forward guidance and leaves markets to form more of their own expectations about the rate path.
According to schedules released by the Federal Reserve and the Federal Reserve Bank of Kansas City, the speech is set for 10 a.m. Eastern time. Jackson Hole, hosted each year by the Kansas City Fed, is widely treated as a key venue for central bank officials to discuss the economy and monetary policy, and for markets to look for signals from the Fed.
The editor’s note in the source article says Michael J. Kramer offers a more controversial interpretation. In his view, Warsh may not be trying to push down long-term yields the way past versions of the Fed often did. Instead, he may be willing to let the yield curve steepen and allow a higher term premium and greater bond volatility to tighten financial conditions. Under that framework, the Fed would not need to raise the policy rate to create restraint. Pressure could still come through mortgages, corporate financing costs, and equity valuations. The note also stresses that this remains Kramer’s reading of Warsh’s possible intentions, not a policy plan confirmed by the Fed.
Attention shifts from Nvidia earnings to Jackson Hole
The article says the market spent the first half of the week focused mainly on Nvidia’s earnings. After Wednesday, attention is expected to move to the Jackson Hole symposium. Warsh’s speech is described as an important window into his monetary policy framework.
One of the main questions for investors is whether he has changed his position on reducing forward guidance. Forward guidance refers to a central bank’s use of public communication to shape expectations about future interest-rate decisions. Kramer’s view is that Warsh is unlikely to reverse course. Instead, the Fed may offer less step-by-step guidance and allow economic data and market prices to play a larger role in setting expectations.
In Kramer’s telling, the effects would not stop at communication. He argues that Warsh may allow longer-dated yields and bond volatility to rise, tightening financial conditions and reducing the need for an immediate rate hike.
Term premium back in focus as author sketches a path to 10-year yields above 5%
Kramer says the term premium on U.S. Treasuries has already started to rise. The term premium is the extra return investors demand to hold long-dated bonds instead of rolling over short-dated ones, compensating for uncertainty around future rates, inflation, and policy.
The article uses the New York Fed’s ACM term premium model. ACM refers to the framework developed by Tobias Adrian, Richard Crump, and Emanuel Moench to separate long-term Treasury yields into expected short-term rates and the term premium. The piece also notes that the term premium cannot be directly observed and that different models can produce different estimates.
Based on data cited by the author, the ACM term premium on the 10-year U.S. Treasury is about 82 basis points, still below the roughly 150 basis point average seen over the decades before quantitative easing. If the term premium were to return to that historical average, and if the neutral rate stayed a little above 4% as the author assumes, the 10-year Treasury yield could rise above 5%.
The article is careful to frame that as a scenario analysis rather than a firm forecast. It depends on two assumptions: that the term premium keeps rising and that the long-run neutral rate remains elevated. If either condition changes, the result could look very different.
Kramer’s main point is not the exact 5% level. It is the pricing logic behind the long end of the curve. If the Fed stops trying to reduce policy uncertainty so actively, investors may demand more compensation for holding long-term debt.
Less forward guidance could reprice bond volatility
The article argues that bond volatility can rise even without a rate increase. Although long-dated yields have already moved higher, the MOVE Index, which tracks implied volatility in options on U.S. Treasuries, remains relatively low. Kramer interprets that as a sign that markets still believe they can broadly predict the Fed’s next steps.
If that sense of certainty fades, each policy meeting could again become an open event. Investors would no longer be able to rule out hikes, cuts, or another pause in advance. Bond prices would become more sensitive to economic data and policy remarks. In that setup, Treasury volatility could be structurally repriced without any actual change in the policy rate.
Kramer says that shift itself could tighten financial conditions. Higher 10-year yields would pass through to mortgage rates and long-term corporate borrowing costs, while also weighing on valuations for long-duration assets such as equities. Higher rate volatility could also widen credit spreads and raise corporate bond issuance costs.
The article adds an important caveat: the federal funds rate remains the Fed’s core policy tool, and this should not be read to mean short-end rates no longer matter. The argument is that long-end yields and bond volatility can also affect the real economy, and in some cases may transmit restraint more directly.
A framework where the long end does part of the tightening first
Under Kramer’s proposed framework, the Fed could allow the yield curve to keep steepening and let long-term yields perform a tightening role that, in his view, has not been fully used.
More specifically, the Fed could scale back forward guidance and stop trying to remove uncertainty around every policy meeting. In an environment where supply, inflation, and fiscal risks remain present, investors may ask for a higher term premium. That would push up long-term yields and bond volatility, letting markets deliver part of the tightening.
If that process weakens demand and helps inflation continue to move lower, the Fed could later reduce short-term policy rates. In that case, the yield curve might show relatively high long-end yields while short-end rates gradually move lower.
That is different from the usual sequence of hiking first and cutting later. Kramer is describing a path where the long end tightens financial conditions first, creating room for cuts at the short end later on.
Still, the article says the framework carries clear risks. Rising long-end yields are not fully under the Fed’s control. If the term premium rises too far, mortgages, corporate funding, and fiscal interest costs could all come under pressure at the same time. If markets read less communication as a sign of an unclear framework, higher volatility could damage the Fed’s credibility rather than help it produce an orderly tightening.
For that reason, the article says it is still too early to tell whether the rise in long-end yields is a channel Warsh wants to use or simply extra compensation markets are demanding for inflation, fiscal, and policy uncertainty.
Japan seen as another source of pressure on global long bonds
Beyond U.S. policy changes, the article points to Japan as another factor that could push global yields higher. Under the Bank of Japan’s latest policy settings, the target for the uncollateralized overnight call rate is currently about 1%. At the same time, Japan’s 10-year breakeven inflation rate has moved close to 2%.
The article explains that the breakeven inflation rate is the difference between nominal government bond yields and inflation-linked bond yields of the same maturity. It is commonly used as a market-based gauge of future inflation, though it also contains liquidity and risk premia.
Kramer argues that firmer inflation expectations in Japan suggest markets are preparing for further monetary policy normalization by the Bank of Japan. Based on TONAR futures pricing cited in the article, implied rates are about 1.19% for September, 1.41% for December, and 1.6% for March of the following year. The piece says these figures reflect market pricing at the time of publication and can change with economic data and policy expectations. They do not represent a fixed Bank of Japan hiking path.
If Japanese rates keep rising, global demand for lower-yielding overseas bonds could weaken at the margin. That would add upward pressure to long-term rates globally. In that environment, the article says, long-dated U.S. Treasury yields may not fall easily even if Warsh does not send a clear signal that more hikes are coming.
Friday’s speech may clarify how Warsh views higher long-end yields
The article closes with a list of questions for Friday. How will Warsh describe the rise in long-term yields? Will he treat it as a form of tightening already delivered on the Fed’s behalf, or as a source of financial risk tied to a higher term premium? Will he continue to reduce forward guidance? Will he explain how the Fed wants markets to interpret its policy reaction function?
The article argues that only clearer answers to those questions can show whether the idea of letting the long end do some of the Fed’s tightening is a framework Warsh may adopt, or a story markets have filled in on their own because he has not said enough yet.