Powell may signal dovish remarks at Jackson Hole, with US debt policy coordination becoming the market's focus.

Markets are closely watching Federal Reserve Chair Kevin Warsh’s speech at this Friday’s Jackson Hole Economic Policy Symposium. As U.S. long-term Treasury yields continue to rise, markets widely expect Warsh to signal a dovish tilt to ease bond market concerns over inflation and fiscal risks. Mark Cabana, head of U.S. rates strategy at Bank of America, noted that markets have grown less sensitive to Warsh’s previous verbal remarks on fighting inflation, with investors now eager to see concrete policy paths to address inflation. Meanwhile, Treasury Secretary Scott Bessent has recently stepped up purchases of long-term Treasuries and increased issuance of short-term T-bills to fund government spending, reflecting a degree of divergence between the Treasury Department and the Federal Reserve in bond market management. The article points out that Bessent’s shift of financing pressure to the short end effectively bets U.S. fiscal costs on future interest rate cuts. If Warsh can drive interest rate cuts by curbing inflation and boosting productivity, the short-term debt financing model is expected to reduce the government’s interest expenses; however, if long-term rates remain elevated, U.S. fiscal pressure could intensify further. Markets also expect the Federal Reserve to adjust its liquidity management and balance sheet policies. Michael Cloherty, head of U.S. rates strategy at CIBC, believes quantitative tightening (QT) could begin as early as the end of 2027, provided regulatory adjustments reduce banks’ demand for reserves. The Federal Reserve currently holds around $1.6 trillion in long-term U.S. Treasuries. Warsh’s remarks at Jackson Hole this time on long-term yields, inflation, and balance sheet reduction paths will likely serve as a key signal to gauge the future degree of policy coordination between the Federal Reserve and the Treasury Department.