Waiting for Warsh's speech, dollar above 2.96 shekels

There are slight movements in the foreign exchange markets ahead of Kevin Warsh's first speech as Fed Chair at the annual Jackson Hole central bankers' conference. In the local market, the dollar is up 0.1% and trading above 2.96 shekels. The euro remains without significant change, trading above 3.45 shekels.

In global markets, the dollar index against a basket of leading currencies is stable at 99.2 points. The euro is trading above 1.16 dollars, and the pound is trading around 1.36 dollars.

Previous Fed chairs used the speech as an opportunity to discuss broad policy frameworks and their intentions regarding interest rates. However, given the approach Warsh has taken since taking office in May, it is difficult to know what to expect. During this period, he has placed more emphasis on market-dictated directions than on signals from the Fed.

"One of the common complaints against Warsh so far is his unwillingness to provide 'forward guidance' regarding the direction he believes the Fed is heading, or to define the 'reaction function' — the conditions that would justify a change in policy. Avoiding this once again could have significant consequences for the markets," said Mark Cabana, head of US interest rate strategy at Bank of America.

Cabana added:

"We expect Warsh to signal that he is prepared to raise interest rates again if inflation does not continue to moderate. Conversely, if he uses the speech to focus solely on broader structural issues, such as productivity or demographics, we fear that the markets might interpret the message as dovish."

In such a scenario, Cabana expects a wave of selling in long-term US government bonds, which could push the yield on 30-year bonds to 5.5% or higher — levels not seen since at least the beginning of the 21st century.

Luke Tilley, chief economist at M&T Bank, expressed skepticism regarding the speech's specificity:

"I really don't expect anything specific. I think he will present a very broad picture at a general level of the work of the task forces and how he thinks the Fed should act, instead of presenting a detailed and practical assessment of the state of the economy."

The backdrop for the chair's expected speech includes sharp recent rises in US government bond yields, which have slowed slightly after Treasury Secretary Scott Bessent announced that the Treasury intends to increase its ongoing bond purchases.

"We are facing the most unusual monetary speech in Jackson Hole that we have seen in recent years, and this is because of Warsh's unforced errors at the beginning of his term," said Joseph Brusuelas, chief economist at RSM. "The actions of the Treasury have undermined Warsh's move. As a result, the Fed Chair is between a rock and a hard place."