A hawkish Federal Reserve chair Kevin Warsh conveyed the benefits of AI on the US economy and warned that inflation remains above where he would like it in his first Jackson Hole keynote on Friday.
Four topics were addressed: artificial intelligence, the future of forward guidance, Warsh’s own guiding principles and his assessment of the economy.
The most-discussed topic going into the address was forward guidance, where markets were invited to take Wash’s outline as “a trail map… just don't call it forward guidance”, which is a practice that has “overstayed its welcome”.
According to Ashok Bhatia, CIO and global head of fixed income at Neuberger, “this read as an olive branch”, with Warsh acknowledging that the practice “was appropriate for its time, framing his approach as a commitment to discipline rather than a pre-emptive decision”.
The comments followed a month in which 30-year treasury yields touched their highest level since 2007, with investors demanding more compensation to hold long-dated debt across developed markets, as Trustnet covered last week.
Bhatia's team estimated that between 85% and 90% of this year's rise in 10-year yields came from real yields rather than inflation expectations, with the 30-year real rate touching 3% for the first time since 2002.
However, they viewed the speech's AI section as the most consequential. He and his team saw Warsh lean toward optimism on the technology's growth effects, even as he flagged uncertainty over its impact on jobs and the distribution of returns – a stance with direct implications for how the Fed treats the current wave of AI-linked capital spending.
“For bond investors, a Fed chair inclined toward AI-as-growth-additive is less likely to treat AI-driven capex, and its effect on real yields, as something requiring a monetary offset,” Bhatia's team wrote, pointing to capital expenditure growth near 9% over four quarters, the fastest pace since 2021.
Warsh described the current moment as “a hinge point of history” and cast artificial intelligence as “a new factor of production”, language Bhatia's team said “elevates it beyond a sector story to a structural shift in how the economy generates output”.
Rich Clarida, PIMCO's economic advisor and a former vice chair of the Federal Reserve Board, read the speech as clearing the way for a rate rise in September. He pointed to Warsh's comments on inflation and financial conditions as the clearest signal markets picked up on.
“Unless underlying inflation is moving to our objective, clearly and at sufficient speed… we have work to do,” Warsh said. Clarida added that the chair judged current financial conditions as “not restrictive”, and that “while this summer's inflation readings were better than expected, they do not tell me that underlying inflation trends have meaningfully improved”.
“Markets appear to have taken these remarks as his intended signal that a discussion about a policy rate hike is clearly on the table for the September meeting,” he said, adding that August's inflation data, due just days before the Fed's next meeting, would be decisive.
The same section was interpreted as ever more hawkish by Bhatia, who cited Warsh's own figures of PCE (personal consumption expenditures) inflation running at 3.7% over 12 months and 4.1% over six months, progress he called “modest”.
About 54% of inflation components have risen more than 3% over the past year, a breadth of price pressure they said was “more hawkish” than their own narrower expectation of a narrative built around shelter and core goods.
For a retail investor, Ben Yearsley, director at Fairview Investing, said Warsh's inflation message went against the US jobs market reading. July payrolls fell by 23,000, with only a modest rebound expected for August.
“Warsh used his first Jackson Hole speech as Federal Reserve chair to remind everyone that central bankers can ruin a perfectly pleasant summer weekend too,” Yearsley said. “Rate rises might be the right medicine for inflation, but the patient is starting to look a little peaky”.
“Nothing says 'everything is fine' quite like the Treasury announcing it is going to buy more treasuries,” Yearsley added, referring to the US Treasury's plan to double its purchases of longer-dated bonds from September.
The dollar weakened for much of August before recovering some of that ground once Warsh had spoken. US treasury yields jumped after the speech, and the 10-year yield finished the month at 4.75%.