What game is Kevin Warsh playing? Speaking at the meeting of G20 finance ministers and central bank governors, he said that the global economy had moved from a state of secular stagnation to a state of secular growth. This implies that current interest rates only look high in historical terms. In reality, they are doing less to restrain GDP growth than they did before. Another round of hawkish rhetoric has pushed the probability of a September Fed rate hike to 66%. Nevertheless, EURUSD bears unexpectedly retreated.
Global bond yields have reached their highest levels since mid-2008, and 10-year US Treasury yields have surged to 19-year highs. However, in the view of Goldman Sachs, these elevated levels do not look catastrophic. They reflect long-term trends that are the result of financial decisions, rising debt, and the broader development of the economy.
At the same time, Scott Bessent’s intention to reduce US Treasury yields is widely known, as is his statement that the Treasury and the Fed are acting on the same wavelength. If one adds Donald Trump’s remark that Kevin Warsh will do what he is supposed to do, then the Fed chair’s hawkish stance does not quite add up. Unless he is playing some kind of game.
According to Wells Fargo, the US dollar will weaken in September because the central bank will not raise rates. Even though Kevin Warsh has nearly convinced investors of monetary tightening. Incidentally, Scott Bessent gave several reasons why policymakers should refrain from tightening. He argued that the economy is currently experiencing a supply shock. Rates are usually not raised unless second-round effects are visible. Core inflation remains subdued, and productivity growth should continue to contain prices.
Interestingly, the Treasury’s intention to bring Treasury yields under control became one of the reasons why the US dollar closed in the red for the second month in a row. Another factor was Kevin Warsh’s restrained rhetoric at the press conference following the FOMC meeting. The Fed chair appears before the public sometimes as a hawk and sometimes as a dove, causing markets to swing between fear and relief.
Even though Kevin Warsh asked at Jackson Hole not to interpret his speech as forward guidance, markets treated it as a signal about the Fed’s future moves. In reality, central bank decisions depend on the data. Therefore, macroeconomic statistics deserve close attention.
