Jackson Hole Is Coming — What Is the Fed About to Do With Interest Rates?

WASHINGTON — Federal Reserve Chair Kevin Warsh arrives at Jackson Hole this week with a problem that does not fit neatly into a rate-cut or rate-hike narrative.

The Fed’s benchmark rate stands at 3.5% to 3.75%. Inflation is still well above the central bank’s 2% objective, while hiring has slowed enough to reopen questions about how much restraint the economy can tolerate. At the same time, the Treasury market has moved in a direction the Fed cannot control directly: the 30-year U.S. government bond yield recently climbed to about 5.34%, its highest level since 2007. (Federal Reserve; Reuters)

Warsh’s keynote remarks on Friday, August 28, will be his first at the annual Kansas City Fed symposium as chairman. The official program runs from August 27 through August 29. (Kansas City Fed)

The timing is unusually crowded. The Bureau of Economic Analysis is due to release July personal income and outlays data, including the PCE inflation figures the Fed follows most closely, on August 26. The next FOMC meeting begins September 15. (BEA; Federal Reserve)

That leaves very little space between the newest inflation evidence and the speech markets have been waiting to hear.

The disagreement inside the Fed is already visible

At its July 28-29 meeting, the Federal Open Market Committee kept the target range at 3.5% to 3.75%. The vote was 9-3. Beth Hammack, Neel Kashkari and Lorie Logan preferred a quarter-point increase. The majority chose to wait. (Federal Reserve; FOMC minutes)

The minutes show how the disagreement was developing. Officials remained encouraged by economic activity and capital investment, but they were also looking at tariffs, energy prices and other forces that could keep inflation elevated. Several participants were concerned that inflation might prove more persistent than expected.

Then the labor data changed the mood.

Nonfarm payroll employment fell by 23,000 in July, while unemployment was 4.1%. Employment declined in local-government education and retail trade; health care continued to add jobs. (BLS)

The report did not point to a labor-market collapse. It did make another rate increase harder to treat as an easy decision.

That distinction matters because the Fed is now watching two separate developments that may not resolve at the same speed. Employment can weaken before inflation falls back to target. Inflation can also remain elevated after demand has begun to lose some momentum.

The next PCE report will provide another piece of that puzzle.

The number investors really need to see

The latest available PCE data, for June, showed headline inflation at 3.7% from a year earlier, down from 4.1% in May. Core PCE was 3.3%. The headline index fell 0.1% from May while core prices rose 0.1%. (BEA)

The absolute level remains uncomfortable for a central bank whose target is 2%.

But the more immediate question is whether July brought another step down or a reversal.

The timing puts Warsh in a peculiar position. He will not be speaking from an old economic snapshot. The inflation report will have arrived two days earlier, and traders will already have absorbed its details.

There are also some differences inside the inflation figures that matter. Energy prices have been volatile, tariff-related costs are filtering through imported goods, and policymakers have been watching price changes in technology equipment and electricity. The Fed’s July minutes specifically warned that inflation could prove more persistent than expected. (Federal Reserve)

None of this tells the Fed exactly what to do.

It does give Warsh a fresh set of numbers with which to frame the argument.

The consumer has started to enter the debate

Retail sales fell 0.6% in July, ending a nine-month run of monthly gains. Timing around Amazon’s Prime Day and lower gasoline prices affected the result, while core retail sales also declined. (Reuters)

The result is easier to understand alongside what major retailers are reporting.

Walmart’s comparable-sales growth slowed to its weakest pace in six years. The company maintained its annual outlook, but investors sold the stock heavily after the results, focusing on weaker traffic and the pressure of higher fuel costs on shoppers. Reuters also reported that Walmart was cutting prices across thousands of products, partly using tariff refunds to support those reductions. (Reuters)

That is not what a collapsing consumer looks like.

It is also not the picture of households moving through a period of effortless demand.

For the Fed, the timing is awkward. Consumer spending is one of the main supports keeping growth positive, yet households are facing higher financing costs while prices remain elevated.

Some of that pressure could fade.

Some may not.

Long-term Treasury yields have become part of the argument

While investors debate what the Fed will do with the overnight rate, the long end of the government bond market has been making its own judgment.

The 30-year Treasury yield reached about 5.34% before falling after the Treasury announced larger buyback operations. The department said it would increase certain purchases of 10- to 30-year debt from $2 billion to at least $4 billion per transaction beginning in September. (Reuters)

The move helped. It did not remove the larger question hanging over the market.

Investors are still financing a federal government with more than $40 trillion in debt, while annual interest costs have moved above $1 trillion. The Treasury market itself contains roughly $32.2 trillion of outstanding debt. (Reuters)

A buyback can improve liquidity and change the supply available in particular maturities.

The government’s financing needs remain.

That matters for the Fed because a high long-term yield can tighten financial conditions without a change in the federal funds rate. Mortgage rates tend to follow longer-term borrowing costs. Corporate projects become more expensive to finance. Investors also apply higher discount rates to future earnings.

The transmission can happen quietly.

No FOMC vote is required.

That is becoming an issue for the AI investment boom

Warsh has spent considerable time discussing the extraordinary amount of capital being committed to high-tech industries.

In July testimony to Congress, he pointed to an equipment-investment increase of about 8% over the year ending in the first quarter and said high-tech spending had risen nearly 25% over four quarters. He also launched working groups to examine productivity, employment in a changing technological environment and the Fed’s broader framework. (Federal Reserve)

The economic case for much of the AI spending rests on what happens after the money is spent.

Data centers have to be built. Chips have to be manufactured. Power has to be added. Networks have to be expanded. The productivity gains come later.

The financing bill arrives first.

The Philadelphia Semiconductor Index fell about 5% during the week ending August 21 as higher yields and concerns over the cost of funding AI infrastructure weighed on the sector. (Reuters)

That does not amount to a verdict on the AI economy.

It does mean investors have started applying a higher cost of capital to one of the most aggressively funded investment cycles in the world.

The stock market has another number to watch

The Fed’s July minutes described asset valuations as elevated and the equity risk premium as unusually low. The concern was less about today’s earnings than about how vulnerable markets could be if financial conditions tightened suddenly. (Federal Reserve)

That is why a rise in Treasury yields can hurt stocks even when corporate results remain solid.

A company does not have to earn less for its valuation to fall. Investors can simply decide that profits arriving several years from now should be worth less at a higher discount rate.

The effect is especially visible in technology stocks, where much of the bullish case depends on long-term earnings and productivity gains.

The recent semiconductor selloff came as the Treasury market was already under pressure.

That timing was not accidental.

Warsh may change how much guidance markets receive

His economic views are only part of the story.

Warsh has also begun reviewing the way the Fed communicates. One of the working groups he created is examining the form and effectiveness of central-bank communication, while another is looking at the inflation framework. (Federal Reserve)

That suggests markets may hear less about a fixed path for interest rates and more about the conditions that would lead policymakers to change direction.

Such an approach would leave more of the forecasting burden to investors.

For traders, that means the next inflation number can matter more. So can payrolls. A Treasury auction could suddenly become more significant if yields are already moving sharply.

The July jobs report demonstrated how quickly expectations can change.

The August 26 PCE release will get its own test two days before Jackson Hole.

The dollar has not been acting like a currency enjoying high U.S. yields

Normally, higher Treasury yields make dollar assets more attractive.

That relationship becomes less straightforward when investors believe the yield increase is being driven by inflation risk, fiscal pressure or a larger premium for holding long-term U.S. debt.

The dollar has remained near multi-month lows as those issues have stayed in focus, while gold has continued to attract investors looking for protection from inflation and geopolitical uncertainty. (Reuters)

The combination is worth watching.

A stronger dollar is not the only possible outcome of a hawkish Fed if markets simultaneously become more worried about the reasons long-term U.S. yields are rising.

That is part of the complication.

The September question is still hanging over everything

The next FOMC meeting is September 15-16. By then, policymakers will have another payroll report, another inflation report and more evidence on consumer activity. (Federal Reserve)

Economists surveyed by Reuters in mid-August mostly expected the Fed to leave rates at 3.5% to 3.75% through year-end. The survey also put average 2026 inflation around 3.5%, with inflation remaining above 2% through at least 2028. (Reuters)

That is not an easy forecast to live with.

It implies an economy that could spend a long period with inflation above target while growth slows enough to put pressure on employment.

There is no single piece of data that resolves that tension.

A weak jobs report makes another hike harder.

A stubborn inflation reading makes a cut harder.

A further jump in oil prices would put both sides under more pressure.

The bond market can tighten conditions even if the Fed does nothing.

There is a separate question about U.S. debt

The discussion is gradually widening beyond the next Fed meeting.

Higher long-term rates feed into the cost of refinancing government debt. The effect is gradual, but with debt above $40 trillion it compounds as old securities mature and new ones are issued.

The Treasury’s buyback program can influence market liquidity. It does not reduce the government’s total obligations.

That is why investors have become increasingly interested in the gap between the Fed’s short-term policy rate and the yield demanded on long-term Treasuries.

A central bank can cut the overnight rate while investors still refuse to bid long bonds to much lower yields.

That possibility would make any future easing less powerful than the headline rate might suggest.

The politics are there, whether markets mention them or not

President Donald Trump has repeatedly argued for lower interest rates. Warsh has said he intends to carry out the Federal Reserve’s responsibilities even when its independence faces pressure.

For bond investors, that is not merely institutional language.

The more confidence markets have in the independence of monetary policy, the easier it is to separate a change in rates from a change in the political environment. When that confidence weakens, the risk can show up in longer-term yields rather than in the policy rate itself.

There is no obvious point at which markets would declare that independence has been lost.

It would be reflected gradually in what investors demand to hold U.S. debt.

The hardest scenario is the one in which nothing resolves cleanly

Suppose hiring continues to weaken into the fall.

Consumer spending loses more momentum.

Inflation remains around current levels because energy prices, tariffs and service costs keep pressure on prices.

The Fed would face competing evidence from nearly every major part of the economy.

A weaker labor market would argue for easing. Inflation above target would argue for patience. High long-term Treasury yields would leave financial conditions tighter even without a policy move.

Companies financing large technology and infrastructure projects would be making decisions against that backdrop.

Households would be doing the same thing when deciding whether to borrow, buy homes or cut spending.

And the government would continue refinancing a debt load that has become much more expensive to carry.

That is where the market’s optimism becomes harder to sustain.

There is still growth.

There is still investment.

There is still considerable resilience in the financial system.

But the buffers are no longer moving in the same direction.

What Jackson Hole can actually settle

Warsh does not control oil prices, fiscal deficits or the long-term Treasury yield.

He can explain how the Fed intends to react to them.

That may be the most useful thing investors can get from Friday’s speech.

The immediate focus will be September, especially after the August 26 inflation report. A hotter PCE reading could strengthen the case for staying restrictive. A softer one would give the labor market more room in the discussion.

But the larger issue will remain visible in the Treasury market.

If long-term yields stay high while the Fed sounds more patient, financial conditions may not ease much.

If the Fed turns more hawkish and the long end rises again, borrowing costs could move higher across the economy.

A softer message could help stocks and short-term bonds, while leaving investors to decide whether inflation risks justify keeping long-term yields elevated.

Then Jackson Hole will be over.

The next payroll report will arrive. Another Treasury auction will take place. Companies will keep spending on AI infrastructure. Consumers will decide how much of their income they can devote to goods, housing and credit.

For now, the market is waiting to hear how Warsh weighs those competing pressures.

The answer will be delivered in a speech.

The verdict will come afterward, in the data and in the price of money.