The biggest thing from Warsh’s Jackson Hole speech wasn’t that a September hike is possible.
It was that the Fed is no longer promising investors anything.
No forward guidance.
No guarantee of cuts.
No promise to protect asset prices.
Warsh said inflation is still too high and the Fed needs to see prices falling clearly toward 2%.
Markets immediately repriced September.
Rate hike odds jumped from about 35% to 57%.
The 2-year Treasury yield jumped to 4.35%.
The 10-year finished around 4.72%.
The 30-year was still above 5.2%.
And PCE inflation is still 3.7%.
That’s the real problem.
The Fed can’t easily cut rates to support stocks while inflation is sitting there.
But hiking rates creates another problem when the government is carrying nearly $40 trillion of debt and refinancing it at much higher yields.
This is why one Reddit comment hit the important point:
“No price in this market is more important than yields.”
I think that’s right.
Everyone keeps watching Nvidia.
Everyone watches oil.
Everyone watches the S&P.
But if Treasury yields can’t be brought under control, eventually everything else has to adjust to the bond market.
And Iran makes this worse.
If the war keeps oil elevated, inflation stays sticky.
If inflation stays sticky, Warsh has less room to cut.
If the Fed stays tight while Treasury issuance remains enormous, the government has to keep paying up for money.
That is the squeeze.
The Fed isn’t just fighting inflation anymore. It’s fighting inflation while Washington needs enormous amounts of new buyers for its debt.
That’s why I think the bond market is becoming the most important market in the world right now.
Not stocks.
Not crypto.
Yields.