When Fed Chair Kevin Warsh steps up to deliver his Keynote at Jackson Hole, markets will naturally look for the headline.
A hint on September. A signal on rates. A shift towards tightening or easing. But that may be the wrong way to approach this speech. Warsh has so far shown relatively little appetite for conventional forward guidance. Rather than telling markets where policy is heading several meetings in advance, his emerging approach appears more focused on observing how the economy and financial markets are evolving, then judging the appropriate policy response.
So, the question heading into his speech is: what should investors be listening for?
There are several areas that could tell us considerably more about the direction of the Fed under Warsh than any explicit signal about the September meeting.
1. What is Warsh's reaction function?
Since taking over at the Fed, Warsh has begun to offer glimpses of how he thinks monetary policy should be conducted. One of the clearest came after the July FOMC meeting, when he framed the policy challenge around judging the balance between supply, demand, productivity and the extraordinary investment associated with the AI capex cycle.
That is subtly different from a traditional Fed framework built around managing aggregate demand relative to an assumed level of supply and for markets that distinction matters. If stronger growth increasingly reflects improvements in productivity or productive capacity, the Fed may be less inclined to interpret economic resilience automatically as inflationary.
In the same measure, if AI investment represents a major demand shock before its productivity benefits arrive, the near-term inflation consequences could look very different. The Jackson Hole Keynote therefore gives Warsh an opportunity to explain how he distinguishes between good growth and inflationary growth, and what evidence would cause the Fed to alter its assessment.
That framework could ultimately be more valuable to investors than knowing whether the next 25bp move comes in September, October or December.
2. How worried is the Fed about persistent inflation?
The inflation backdrop Warsh inherited is not straightforward. Vanda research has previously highlighted the risk that continued demand resilience, alongside the AI-related investment boom, could generate further price pressure. At the same time, Warsh has questioned some of the assumptions that have traditionally shaped the Fed's inflation framework.
Before taking office, he argued that policymakers should move away from the idea that inflation necessarily results from an economy growing too quickly or wages rising too strongly. And more recently, his confirmation hearing highlighted trimmed mean inflation as a preferred measure.
None of this necessarily tells investors whether Warsh is currently hawkish or dovish. It does, however, suggest the Fed under Warsh may increasingly assess inflation through a different lens. Jackson Hole could therefore provide clues about which inflation measures he trusts, which pressures he considers persistent, and which he is willing to look through.
That becomes particularly important if core inflation remains sticky into 2027.
3. Does Warsh want markets to stop expecting forward guidance?
There is another important shift taking place in Warsh’s approach over his predecessors. Markets have traditionally spent enormous amounts of time parsing Fed language for signals about the next meeting, and Warsh may be less interested in playing that game.
After July's press conference, our Central Bank Strategy team described investors as increasingly learning to “play the ball, not the referee.” In other words, markets are responding to what financial conditions, real rates, inflation and economic data are doing rather than waiting for the Fed to explain where policy is heading, and that creates an interesting dynamic.
If tighter financial conditions are already doing some of the Fed's work, policymakers may prefer to avoid unnecessarily reinforcing that tightening through communication. In that scenario, Warsh's relative reluctance to give forward guidance may therefore be intentional rather than simply a communication gap. Jackson Hole is an opportunity to clarify that.
Investors should pay attention not just to what Warsh says about policy, but to how he believes monetary policy should be communicated at all.
4. What role do financial markets play in the policy framework?
Warsh's arrival at the Fed initially generated expectations of a potentially significant change in policy regime. The market reaction was ultimately more restrained, and some of the initial move in term premium subsequently normalised.
The episode highlighted something important. Changes in the Fed's perceived reaction function can affect longer-term rates well before policymakers actually move the policy rate, which makes the long end particularly important around Jackson Hole.
If Warsh uses the speech to discuss the Fed's balance sheet, financial conditions or the relationship between monetary policy and market pricing, investors may learn considerably more about the future direction of the Treasury curve than they do about the next FOMC decision.
His previous argument that the Fed's balance sheet could be reduced materially while lower policy rates support households and smaller businesses also raises the possibility of a policy mix quite different from that of recent years.
Any shift of that kind of scale would be a medium-term project.
But Jackson Hole is exactly the type of venue where the intellectual foundations for such a shift could begin to emerge.
The bigger question
Markets will inevitably attempt to translate every sentence from Jackson Hole into basis points. Warsh does not necessarily need to tell investors what the Fed will do next. He does, however, need to give them a better understanding of how the Fed will decide what to do next.
How does it interpret AI-driven investment? How does it distinguish supply expansion from excess demand? Which inflation measures matter most? How much weight does it place on financial conditions? And how does Warsh want markets to think about the relationship between rates and the Fed's balance sheet?
And if Jackson Hole provides clearer answers, the biggest reaction may ultimately be felt not in expectations for the next meeting, but in credibility, term premium and the longer end of the curve.
That’s the setup Vanda is watching. Follow the moves that matter as they happen. Compete the form below to request access.