The chairman of the Federal Reserve, Warsh, is about to make an appearance at the Jackson Hole annual meeting, which the market sees as the most critical risk event regarding the current trends of U.S. Treasury bonds and the U.S. dollar. Against the backdrop of the Treasury Department increasing the buyback of long-end government bonds and the U.S. dollar continuing to be under pressure, whether Warsh can clearly signal anti-inflation measures will directly determine the direction of the 30-year Treasury bond yield.

According to reports from the Momentum Trading Desk, expectations for Warsh's upcoming speech have quietly shifted, as a sustained rebound in the bond market is forcing this usually resistant Fed chairman to adjust his communication strategy. Bank of America strategists Mark Cabana, Stephen Juneau, and Alex Cohen warn that if Warsh fails to clearly articulate the inflation outlook and the monetary policy response function, the 30-year Treasury bond yield could quickly test levels of 5.5% or even higher, putting the dollar under new downward pressure.

Barclays economists, including Marc Giannoni, also pointed out in a report released on August 21 that although it is unlikely Warsh will provide specific interest rate guidance, the market will closely monitor whether he makes it clear that if inflation does not improve, the Fed is willing to restart rate hikes. Barclays believes that the likelihood of Warsh making such statements exceeds 50%, which would help reinforce the policy response function already implied in current market pricing.

The Jackson Hole annual meeting is an annual economic policy seminar hosted by the Kansas City Fed, bringing together central bank officials, policymakers, scholars, and economists from around the world. This year's meeting will be held from August 27 to 29, with the theme "Financial Innovation: Impact on Payments and Policy." Warsh's speech is scheduled for August 28 at 10 AM Eastern Time (10 PM Beijing time), and historically there is no public Q&A session after the speech.

Bank of America points out that the market places particular importance on Jackson Hole for two reasons: first, the seven-week gap between the July and September FOMC meetings is the longest of the year, during which two non-farm and CPI data will be released, and the market has historically viewed this as a window for the Fed to signal policy intentions; second, summer market liquidity is usually thin, so any statements could lead to more intense price volatility.

The special nature of this meeting lies in the fact that both the bond market and the dollar are in a fragile state. Last week, the U.S. Treasury announced an increase in the buyback of long-end government bonds, and on the day the news was announced, the dollar fell sharply. Bank of America believes this move reflects the government's concern about the continued rise in long-end yields. Coupled with the previously "dovish" July FOMC meeting and the weakening of U.S. economic data in August, the dollar has faced multiple bearish pressures.

Warsh has long resisted forward guidance, and at the July FOMC press conference, he stated that the direction of his speech at Jackson Hole was not yet determined, listing two possibilities: first, focusing on macro long-term issues such as productivity, demographics, and the global economy; second, directly discussing recent policy directions from September to December.

Bank of America believes that the market's "forcing" effect is changing this choice. The report cites the famous saying from boxer Tyson: "Everyone has a plan until they get punched in the face," pointing out that the bond market's sustained "heavy punches" are making it difficult for Warsh to continue avoiding policy statements.

Bank of America strategists expect that Warsh will use a speech style similar to that of Fed officials Paulson and Cook, clarifying the policy response path under two scenarios: If the recent disinflation process continues, then maintain the current position; if inflation remains high, then clearly indicate a readiness to restart rate hikes. Bank of America believes that this framework-style statement can effectively convey the policy response function without providing specific path commitments.

Barclays holds a similar judgment and points out that Warsh may also express opinions on the forward guidance system itself—he has consistently criticized forward guidance as constraining policy flexibility and leading to historical policy mistakes; after taking office, he established a special working group to conduct evaluations on this. Moreover, Warsh may provide more information on the Fed's balance sheet policy, but under the current backdrop of already high long-end yields, any further statements regarding a reduction in portfolio duration need to be particularly cautious.

Bank of America provides two clear market scenario forecasts based on Warsh's speech content.

Scenario One: Warsh releases a rate hike signal as expected. If he clearly states a willingness to restart rate hikes in the event inflation does not decrease, Bank of America predicts: the probability of a rate hike at the September FOMC meeting will rise from the current approximately 9 basis points pricing to 12.5 basis points (a fifty-fifty chance); the total pricing range for this rate hike cycle will rise from approximately 40 basis points to nearly 50 basis points; nominal and real yield curves will tend to flatten; and the dollar is expected to recover some losses.

Scenario Two: Warsh avoids policy statements. If the speech focuses on productivity, AI-driven disinflation, or deliberately avoids recent policy discussions under the guise of "not providing forward guidance," Bank of America warns that the market may interpret this as a dovish signal, leading to a further steepening of the curve, and the 30-year Treasury bond yield could quickly break above 5.5%, putting the dollar under new selling pressure.

Bank of America emphasizes that the recent weakness of the dollar has shown a disturbing signal—after the announcement of the buyback, the dollar dropped while the interest rate differential between the U.S. and other countries widened, which is a typical characteristic of risk premium expansion and reflects the market's potential concerns about "fiscal dominance." If Warsh's statements further reinforce external doubts about the independence of the Fed's monetary policy, the "dollar depreciation" camp will gain more ammunition.

From historical data, the impact of Jackson Hole on the U.S. Treasury market is usually limited. According to Bank of America's statistics, since 2010, the yield on the 10-year Treasury bond has generally declined slightly after the annual meeting but typically retracted within the next 10 trading days. The year 2025 is an exception—during that year, the Fed's emphasis on the downside risks in the labor market triggered a sustained decline in yields and a noticeable weakening of the dollar.

The historical pattern of the forex market is similar: the dollar often weakens slightly before and after the annual meeting, but usually recovers in the following weeks; during Powell's tenure, the average response of the dollar to Jackson Hole has been relatively larger. The year 2022 is the most prominent recent example—at that time, Powell delivered a strongly worded speech against inflation, directly triggering a significant rise in interest rates and a strengthening of the dollar.

Bank of America notes that the background this year is different from previous Jackson Hole meetings: the Treasury has already intervened in long-end yields, and the ball is now in Warsh's court ("Bessent acted, Warsh now holds the ball"). At this particular moment, if Warsh fails to meet the market's minimum expectations for policy credibility, this year's annual meeting may become one of the most impactful on the market in recent years.