That has left the market in the dark. Investors say Warsh has also sown market confusion and stoked doubts about his credibility on inflation in part by hinting at last month's policy meeting that rising yields, by tightening monetary conditions, could reduce pressure on the Fed to hike rates even as rising prices remain well above its 2% target.
They hope the Fed chair will use his speech to fully explain his roadmap for returning inflation to the Fed's target and what he sees as the bond market's role in that strategy.
"This lack of direction can be frustrating," said Robert Gill, a portfolio manager at Fairbank Investment Management in Toronto. "It is causing uncertainty and contributing to higher long-term bond yields, and this is an outcome that he seems to be designing."
The picture has been complicated further by the Treasury Department's interventionist pivot after this month's selloff in long-dated Treasury bonds — fueled in part by fears over swelling sovereign debt and an expected rise in issuance — drove yields to near two-decade highs.
In a surprise move, the Treasury subsequently doubled buybacks on long-dated bonds, an operation Secretary Scott Bessent said aimed to support liquidity but which investors widely saw as an effort to tamp down yields. The relief was short-lived.
While investors do not expect Warsh to comment directly on the Treasury's debt management policy, the combination of its increased buybacks and elevated term premia, the extra compensation investors demand for holding long-term bonds, highlights a growing challenge for the Fed which investors hope he will address.
In particular, they want Warsh to more strongly commit to the 2% inflation target as measured by the annual change in the price index for personal consumption expenditures, and to clearly explain how the Fed plans to respond if inflation continues to run above target.
"Are they going to give it a year, or are you going to try to get it in compliance in six months?" said Vishal Khanduja, head of the Broad Markets Fixed Income team at Morgan Stanley Investment Management in Boston.
Underscoring that uncertainty, the market is pricing in a growing chance of a hike, despite falling payrolls and slowing price rises suggesting the economy is in no immediate danger of overheating. U.S. rate futures are pricing in a 40% chance of a rate hike next month, up from 33% a week ago, according to the CME's FedWatch.
"It makes little sense to keep markets in the dark," said Royce Mendes, head of macro strategy at Desjardins in Toronto.
TLT•
