Market Impacts: Allspring’s Views on Warsh’s Speech at Jackson Hole
What do Federal Reserve (Fed) Chair Kevin Warsh's comments at the Jackson Hole Symposium mean for rates, bonds, and markets? Read Allspring's take on Warsh's comments, market reactions, rate expectations, and investment implications.
Warsh’s speech at Jackson Hole
Fed Chair Kevin Warsh delivered a speech at the Kansas City Fed’s Jackson Hole Symposium, which we believe carried a hawkish bias. While there was little new information in the speech, it helped clarify his thinking and emphasized that knowledge does not extend to predicting the future and “…the accuracy in forecasting is just an aspiration.” To us, this suggests that the Fed remains data dependent and markets should anticipate ongoing volatility.
In his comments, he noted the U.S. economy appears to be operating at full employment with a healthy level of economic activity, and he saw few signs that financial conditions were restrictive. However, he also emphasized that inflation remains above target and the Fed still has work to do: “Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job … our mandate … and our charge to keep.”
Investment implications
- Market expectations for a rate hike in September rose to >55% from about 40% prior to Warsh’s speech.
- The U.S. Treasury yield curve flattened as front-end yields increased while long-end yields held steady with a pivot around the 10-year maturity point on the curve.
- Equities rallied while gold prices fell, oil prices are unchanged, and credit spreads are stable.
- Overall, a “mid-cycle” adjustment seems likely at this juncture and consistent with a strong economy and above-target inflation. Futures markets are pricing in approximately two 25-basis-point* hikes over the next six months, which seems reasonable.
Allspring’s views
- We believe “defensive carry” in fixed income portfolios remains the name of the game as the Fed attempts to engineer slower inflation without disrupting the health of the broader economy.
- Yields in the intermediate part of the curve appear attractive based on the aforementioned economic backdrop, while long-end bond yields continue to offer generous real yields, after adjusting for inflation. Short-maturity bonds may lag moves further out the curve, but given the elevated levels of current yields, we believe they should be able to weather a period of price volatility.
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*100 basis points (bps) = 1.00%
Carry refers to the net return earned from holding an asset over time, independent of price movements, after accounting for the costs of financing or maintaining that position.
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