Over the last couple of years, investors have looked to the annual Jackson Hole meeting for clues about where interest rates and the markets might be heading. The formula was fairly straightforward. Listen to the Fed Chair, look for a hint, and then watch the markets interpret every word.
This year was a little different. Markets went into Jackson Hole hoping for a signal that the Fed was getting closer to easing. Instead, newly appointed Chairman Kevin Warsh sounded decidedly hawkish.
His message was that underlying inflation has not improved enough while the economy remains relatively resilient and the 2% inflation target is still firmly in place. In other words, investors should not get too comfortable with the idea of rate cuts. A hike remains a possibility.
Markets quickly adjusted their expectations. It is quite a change from where we were not long ago, when the main question was how quickly the Fed would cut rates. Now, investors are once again discussing the possibility of rate hikes. I am not entirely convinced.
I’m not buying the Fed rate hike. I know, I know, the Fed is in a difficult position. Hike ahead of the mid-terms or something else could happen. The Fed can talk tough. Markets will listen at least for a while. Eventually, the bond market may ask a rather simple question: how much of this talk is the Fed actually prepared to act on?
At the same time, I have been watching the Dollar/Yen closely. The Yen remains an important part of this whole equation given the interest-rate differential and the potential implications for global liquidity and risk appetite. In case you are not aware, Japan’s 10-year JGB yield reached 3% on September 1, 2026, effectively a 30-year high.
