Jackson Hole becomes a key battle for U.S. bonds, Bank of America warns: If Waller does not signal a rate hike, the 30-year yield may soar to 5.5%

Author: Zhang Yaqi
Federal Reserve Chairman Warsh is set to appear at the Jackson Hole annual meeting, which the market views as the most critical risk event for the current trends in U.S. Treasuries and the dollar. Against the backdrop of the Treasury's increased buyback of long-term government bonds and the continued pressure on the dollar, whether Warsh can clearly signal anti-inflation measures will directly determine the direction of the 30-year Treasury yield.

According to news from the Wind Trading Desk, a research report released by Bank of America on August 24 indicates that market expectations for Warsh's speech have quietly shifted— the ongoing rebound in the bond market is forcing this Federal Reserve chairman, who has traditionally resisted forward guidance, to adjust his communication strategy. Bank of America strategists Mark Cabana, Stephen Juneau, and Alex Cohen warn that if Warsh fails to clearly articulate the inflation outlook and the monetary policy response function, the 30-year Treasury yield could quickly test 5.5% or even higher, and the dollar will face a new round of downward pressure.

Barclays economist Marc Giannoni and others also pointed out in a report released on August 21 that while Warsh is unlikely to provide specific interest rate path guidance, the market will closely watch whether he clearly states—if inflation does not improve, the Federal Reserve is willing to restart rate hikes. Barclays believes the probability of Warsh making such a statement is over 50%, which will help reinforce the policy response function already implied in current market pricing.

Meeting Background: Both the Bond Market and the Dollar are Under Pressure, Why is This Time Different?

The Jackson Hole annual meeting is an annual economic policy seminar hosted by the Kansas City Fed, gathering central bank officials, policymakers, scholars, and economists from around the world. This year's meeting will be held from August 27 to 29, with the theme "Financial Innovation: Impacts on Payments and Policy." Warsh's speech is scheduled for 10 AM Eastern Time on August 28 (10 PM Beijing Time on the 28th), and historically, there is no public Q&A session following the speech.

Bank of America points out that the market is particularly focused on Jackson Hole for two reasons: First, the seven-week interval between the July and September FOMC meetings is the longest of the year, during which two non-farm payroll and CPI data releases will occur, and the market has historically viewed this as a window for the Federal Reserve to signal policy intentions in advance; second, summer market liquidity is thin, and any statement could trigger more severe price volatility.

The uniqueness of this year's meeting lies in the fact that both the bond market and the dollar are in a fragile state. The U.S. Treasury announced last week that it would increase its buyback of long-term government bonds, and on the day the news was released, the dollar fell sharply. Bank of America believes this move reflects the government's concern over the continued rise in long-term yields. Combined with the previously "dovish" July FOMC meeting and the weakening U.S. economic data in August, the dollar has faced multiple headwinds.

Market Expectations: Warsh Needs to "Break Away" from His Past Self

Warsh has long resisted forward guidance. At the July FOMC meeting press conference, he stated that the direction of his Jackson Hole speech was not yet determined and listed two possibilities: one, focusing on macro long-term issues such as productivity, demographics, and the global economy; two, directly discussing the recent policy direction from September to December.

Bank of America believes that the market's "pressure" effect is changing this choice. The report cites the famous quote from boxer Tyson—"Everyone has a plan until they get punched in the face"—pointing out that the bond market's continuous "heavy punches" against Warsh have made it difficult for him to continue avoiding policy statements.

Bank of America strategists expect that Warsh will reference the recent statement styles of Federal Reserve officials Paulson and Cook, clarifying policy response paths under two scenarios: if the recent disinflation process continues, he will maintain the current stance; if inflation remains high, he will clearly indicate a readiness to restart rate hikes. Bank of America believes that this framework-style statement can effectively convey the policy response function without providing specific path commitments.

Barclays shares a similar judgment and points out that Warsh may also express views on the forward guidance framework itself—he has consistently criticized forward guidance for constraining policy flexibility and leading to historical policy errors, and after taking office, he established a special working group to evaluate this. Additionally, Warsh may provide more information on the Federal Reserve's balance sheet policy, but in the current context of already high long-term yields, any further statements about shortening the portfolio duration need to be particularly cautious.

Two Scenarios: Differentiated Trends for Interest Rates, Curves, and the Dollar

Based on the content of Warsh's speech, Bank of America has provided two clear market scenario forecasts.

Scenario One: Warsh Releases Rate Hike Signals as Expected. If he clearly states a willingness to restart rate hikes in the absence of declining inflation, Bank of America expects: the probability of a rate hike at the September FOMC meeting will rise from the current pricing of about 9 basis points to 12.5 basis points (i.e., a 50-50 chance); the total pricing range for this rate hike cycle will increase from about 40 basis points to nearly 50 basis points; nominal and real yield curves will tend to flatten; and the dollar is expected to recover some of its losses.

Scenario Two: Warsh Avoids Policy Statements. If the speech focuses on structural narratives such as productivity and AI-driven disinflation, or deliberately avoids recent policies under the pretext of "not providing forward guidance," Bank of America warns that the market may interpret this as a dovish signal, leading to further steepening of the curve, with the 30-year Treasury yield potentially quickly breaking above 5.5%, and the dollar will also face new selling pressure.

Bank of America emphasizes that the recent weakness of the dollar has shown a disturbing signal—after the buyback announcement, the dollar's decline occurred against the backdrop of widening interest rate differentials between the U.S. and other countries, which is a typical characteristic of risk premium expansion, reflecting the market's potential concerns about "fiscal dominance" risks. If Warsh's statements further reinforce doubts about the Federal Reserve's monetary policy independence, the "dollar depreciation" camp will gain more ammunition.

Historical Reference: Jackson Hole is Usually Not a Market Turning Point, but This Year May Be an Exception

Historically, the impact of Jackson Hole on the U.S. Treasury market has generally been limited. According to Bank of America statistics, since 2010, the 10-year Treasury yield has often slightly declined after the annual meeting, but this trend typically retracts within 10 trading days post-meeting. The year 2025 was an exception—when the Federal Reserve emphasized the downside risks to the labor market, it triggered a sustained decline in yields and a noticeable weakening of the dollar.

The historical pattern in the foreign exchange market is similar: the dollar often weakens slightly before and after the annual meeting but usually recovers in the following weeks; during Powell's tenure, the dollar's average response to Jackson Hole has been relatively larger. The year 2022 is the most prominent recent example—at that time, Powell delivered a strongly worded anti-inflation speech, directly triggering a significant rise in interest rates and a strengthening of the dollar.

Bank of America points out that this year's context is different from previous Jackson Holes: the Treasury has already taken the initiative to intervene in long-term yields, and the ball is now in Warsh's court ("Bessent acted, Warsh now holds ball"). At this critical moment, if Warsh fails to meet the market's minimum expectations for policy credibility, this year's meeting may become one of the most impactful on the market in recent years.