Warsh and peace

Katie Martin (0:00)

Sometimes what we all really need is a good dose of nice fresh air. And every year, that is exactly what the big dogs of global finance do. All the world's most powerful central bankers head to the beautiful mountains and talk big money in a little place called Jackson Hole. The latest get together was at the weekend that just passed, and it came at a very delicate time. Investors have been puzzled about what the US Central Bank is up to, whether it really does want to tackle inflation with higher interest rates, or whether there's a little part of it that wants to keep Donald Trump happy by keeping rates low. All that uncertainty has been helping to hurt bond markets. The good news is that Kevin Warsh, the new-ish chair of the Federal Reserve, has calmed some of those nerves with tough talk on inflation. The bad news is that bond markets are still in pain. So today on the show, what did we really learn from Jackson Hole? And are bonds kind of stuffed either way?

This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a columnist at FTHQ in London town.

Joining me down the line from New York City is the big guy, Rob Armstrong. Rob, how's it going? You're coming to London soon, aren't you?

Rob Armstrong (1:19)

Yes, I am. And we should say that this is very exciting for our listeners because we will be at the FT Weekend Festival this weekend, which is an opportunity for all of you out there, instead of calling the two of us drooling morons in the comments, to come do it in person. So I encourage both our fans and our critics to come see us do our thing in person and then give us a piece of their minds.

Katie Martin (1:50)

Be mean to our faces. Okay. So look, let's rewind a little bit, this whole Jackson Hole thing of me.

And investors have had a rocky ride with Kevin Warsh, the new chair of the Fed. Let's set the scene a little bit there.

Rob Armstrong (2:09)

Okay, Kevin Warsh had two Fed press conferences before his speech in Jackson Hole. And it is my view and the view of a lot of other people that they did not go particularly well.

Famously, he withdrew forward guidance. So he said, right from the outset, I'm not gonna talk about any future Fed actions and what they're likely to be. And this is fine. Philosophically, there are good reasons to be skeptical of forward guidance. However, he wasn't very clear on what was replacing it, or what he would be doing, or what his other relevant attitudes were.

And he said a couple of genuinely spooky things, like, well, maybe that 2% PCE inflation target is something we could discuss changing in the future. Which is not something that a new Fed chair should say.

Katie Martin (3:03)

Yeah, you don't monkey about with your inflation measures. But he also said, so even before he did his second press conference, the bond market had already been weakening quite a lot. So borrowing costs have been pushing higher. And he was like, that's fine.

Rob Armstrong (3:17)

Yes.

Katie Martin (3:18)

You know, I'm fine if bonds are weaker and borrowing costs are higher, because there are various benefits that come with that. So the market was like, oh, Kate Chief, message received and understood. We're going to keep selling these bonds, because that's what you want us to do.

Rob Armstrong (3:31)

And again, it's perfectly respectable for a Fed chair to say, look, the long end of the yield curve is going to do what it's going to do. That's not my job. Right. That's a fine thing for him to say.

But it's different when you say that and people are already wondering, what exactly is this guy up to in terms of inflation? What is his policy going to look like? So again, I'm quite sympathetic to Warsh's philosophy so far as we understand it. It's a question about execution, which brings us to Jackson Hole, where I think his execution was a lot crisper.

Katie Martin (4:09)

Yeah. So the market was unnerved by the early press conferences from Kevin Warsh. But then on top of that, the bond market had continued weakening from there. And as we were talking about in the podcast just the other day, the Treasury Secretary jumped in and took various actions to try and quote unquote stabilize the bond market, which was basically him saying, guys, knock it off. Stop selling these bonds. I don't like these borrowing costs being so high.