Federal Reserve Chair Kevin Warsh's upcoming Jackson Hole speech is unlikely to help clear up investor confusion over the Treasury Department's bond market intervention, Morgan Stanley said in a note sent Monday.
Warsh's debut speech as Fed chief at the annual economic policy symposium on Friday comes as investors figure out the implications of the Treasury Department's surprise announcement of an expanded debt buyback plan last week.
Morgan Stanley economists view the expansion in bond buybacks as evidence that the Treasury had become uncomfortable with a rise in long-term interest rates.
"The announcement raises more questions than answers about the relationship between Treasury debt management and Federal Reserve policy and the degree of coordination between the two institutions," Morgan Stanley Chief US Economist Michael Gapen said.
Fed policy statements have become significantly shorter under Warsh's leadership, removing forward guidance.
Warsh will likely remain silent on the near-term outlook for monetary policy, including the expansion of the buyback program, Gapen said. "We expect (Warsh) to stay the course, say less, and diminish the importance of events like Jackson Hole in the Fed's communication apparatus," Gapen said.
The Treasury's announcement on Wednesday came two days after the 30-year Treasury yield pushed above 5.3% to the highest level since 2007. The yield was down five basis points at 5.23% intraday Monday, while the 10-year yield fell 4.2 basis points to 4.7%.
Warsh has effectively endorsed higher long-end interest rates as a mechanism for tightening financial conditions and restoring price stability, according to Gapen.
"If the Treasury has become more sensitive to increases in long-term borrowing costs and higher term premiums are viewed by the Fed as needing to reduce inflation, then expanding buybacks may increase the probability that the Fed needs to raise short-term interest rates to achieve price stability," Gapen said.
Markets are pricing in a 58% chance that the Fed will keep its benchmark rate steady in September, with the remaining odds in favor of a 25-basis-point hike, according to the CME FedWatch tool.
