Editor's Note: On August 28th (this Friday), according to the schedule released by the Federal Reserve, Chairman Kevin Warsh will deliver his first Jackson Hole speech after taking office. Investors are not only watching for any hints about the next direction of interest rates, but also whether he will continue the communication strategy of reducing forward guidance and letting the market form its own interest rate expectations.

Note: The Jackson Hole Global Economic Symposium is hosted annually by the Federal Reserve Bank of Kansas City. It is an important meeting for central bank officials from various countries to discuss economic and monetary policy, and a key window for the market to observe signals of Federal Reserve policy.

Michael J. Kramer proposes a more controversial interpretation in this article: Warsh may not intend to actively suppress long-term interest rates as the Fed has done in the past, but rather hopes to allow the yield curve to steepen, tightening financial conditions through higher term premiums and bond volatility. Under this framework, the Fed could potentially restrain demand through pressure on mortgage rates, corporate financing costs, and stock valuations even without raising the policy rate.

This remains the author's speculation about Warsh's policy intentions and is not a confirmed policy arrangement by the Federal Reserve. What is truly worth paying attention to is that if the Fed reduces its management of market expectations, long-term interest rates may no longer be just a passive reflection of the rate hike path but could become an independent variable affecting financial conditions. Friday's speech will provide the first important test for this judgment.

The following is a translation of the original article:

In the first half of this week, market attention has been focused mainly on Nvidia's earnings report; after Wednesday, the focus will shift to the Jackson Hole Global Economic Symposium.

Federal Reserve Chairman Kevin Warsh is scheduled to deliver a keynote speech on August 28th. This will be his debut at Jackson Hole as Chairman and is an important window for the market to observe his monetary policy framework. The schedules released by the Federal Reserve and the Kansas City Fed show that the speech will begin at 10:00 AM Eastern Time.

Investors will focus on judging whether Warsh has changed his stance on reducing forward guidance. Forward guidance is a policy tool where central banks influence market expectations for future interest rate paths through public communication. In the view of the author of this article, Michael J. Kramer, Warsh is highly unlikely to change course: the Fed will reduce its "hand-holding guidance" to the market, allowing economic data and market prices to play a more important role in pricing.

The resulting impact may not be limited to policy communication. Kramer judges that Warsh may allow long-end yields and bond volatility to rise, thereby tightening financial conditions and reducing the need for immediate rate hikes.

Return of Term Premium: Could the 10-Year Treasury Return to 5%?

The author observes that the term premium on US Treasuries has already begun to rise. The term premium is the additional return investors demand for holding long-term bonds instead of continuously rolling over short-term bonds, primarily compensating for future interest rate, inflation, and policy uncertainty.

This article uses the ACM term premium model published by the New York Fed. ACM refers to the estimation framework established by Tobias Adrian, Richard Crump, and Emanuel Moench to decompose long-term Treasury yields into expected short-term rates and the term premium. It should be noted that the term premium cannot be directly observed, and different models may yield different results.

According to the data cited by the author, the 10-year Treasury ACM term premium is approximately 82 basis points, still below the pre-QE multi-decade average level of about 150 basis points. If the term premium recovers to this historical average, combined with the author's assumption of a neutral rate slightly above 4%, the 10-year Treasury yield could potentially rise above 5%.

The ACM term premium for the US 10-year Treasury has already rebounded, but according to the author's measure, it remains below the long-term average level before QE.

This calculation is closer to a scenario exercise, not a definitive forecast for the 10-year yield. It relies on two key assumptions: continued rise in the term premium, and long-term neutral rates remaining at relatively high levels. Any change in these conditions could make the outcome significantly different.

But what the author is truly concerned with is not the specific level of 5%, but the pricing logic of long-end rates: if the Fed stops actively reducing policy uncertainty, investors may demand higher term compensation.

Without Raising Rates, Bond Volatility Can Also Increase

Reducing forward guidance could also push up implied volatility in the bond market.

Although long-end yields have risen recently, the MOVE index, which measures implied volatility in Treasury options, remains at relatively low levels. The author interprets this as the market still believing it can roughly predict the Fed's upcoming policy path.

Long-end yields have already risen, but implied volatility in Treasury options has not yet been significantly revalued in sync. The author believes reducing forward guidance could change this state.

If this certainty disappears, each FOMC meeting could once again become an "open event": investors cannot rule out the possibilities of a hike, cut, or hold in advance, and bond prices will also become more sensitive to economic data and policy statements. Without actually adjusting interest rates, Treasury volatility may undergo a structural revaluation.

The author believes this change itself can tighten financial conditions. Higher 10-year yields would transmit to mortgage rates and long-term corporate financing costs, depressing valuations of long-duration assets like stocks; higher interest rate volatility could also widen credit spreads and increase corporate debt issuance costs.

It is important to downgrade the understanding: the federal funds rate remains the core tool of the Fed's monetary policy; one cannot simplistically think the short end "doesn't matter." What the author proposes is another layer of market interpretation: beyond the policy rate, long-end yields and bond volatility can also influence the real economy, and their transmission might be more direct.

Let the Long End Complete the Tightening, Then Create Room for Short-End Rate Cuts

In the policy framework envisioned by Kramer, the Fed may allow the yield curve to continue steepening, letting long-end rates assume a tightening function they haven't fully played in the past.

Specifically, the Fed could reduce forward guidance, no longer striving to eliminate uncertainty before each policy meeting. In an environment where supply, inflation, and fiscal risks persist, investors would demand higher term premiums, pushing up long-end yields and bond volatility, letting the market complete part of the tightening.

If this process can suppress demand and drive a sustained decline in inflation, the Fed could subsequently lower short-end policy rates. At that point, the yield curve might exhibit relatively high long-end rates while short-end rates gradually decline.

In other words, the path envisioned by the author is not the traditional "hike first, then cut," but rather letting the long end tighten financial conditions first, then creating room for short-end rate cuts.

However, this framework carries obvious risks. The rise in long-end yields is not entirely under the Fed's control. If the term premium rises too much, mortgages, corporate financing, and fiscal interest burdens could face pressure simultaneously; if the market interprets reduced communication as a lack of clarity in the policy framework, rising volatility could also damage the Fed's credibility rather than help it achieve orderly tightening.

Therefore, it is not yet clear whether the rise in long-end rates is a policy channel Warsh hopes to utilize, or merely the market's demand for additional compensation due to inflation, fiscal, and policy uncertainties.

Japan's Interest Rate Normalization Adds More Pressure on Global Long Bonds

Besides policy changes in the US itself, the author also views Japan as another factor pushing global interest rates higher.

According to the Bank of Japan's latest policy, the target for the Japanese Uncollateralized Overnight Call Rate is currently around 1%. Meanwhile, Japan's 10-year breakeven inflation rate has approached 2%. The breakeven inflation rate is the yield difference between nominal and inflation-linked government bonds of the same maturity, usually considered an estimate of future inflation by the market, but it also contains liquidity and risk premiums.

Japan's 10-year breakeven inflation rate has risen to about 2%, and market expectations for the Bank of Japan to further normalize monetary policy have subsequently increased.

The author believes that the recovery in Japan's inflation expectations means the market is preparing for the Bank of Japan to further normalize monetary policy. According to the TONAR futures pricing he cites, the market-implied rates are approximately 1.19% for September, 1.41% for December, and 1.6% for March of next year. These numbers reflect market pricing at the time of the article's publication, which will change continuously with economic data and policy expectations, and do not represent a confirmed rate hike path by the Bank of Japan.

The TONAR futures pricing at the time of the article's publication shows the market is pricing in the possibility of further increases in Japanese short-end rates. Futures prices change with data and policy expectations and do not represent a confirmed rate hike path by the Bank of Japan.

If Japanese interest rates continue to rise, global capital's demand for low-yielding foreign bonds may marginally weaken, and global long-term rates will face more upward pressure. In such an environment, even if Warsh does not send a clear signal for rate hikes, the long end of US Treasuries may not be able to easily retreat.

What truly needs to be observed on Friday is how Warsh describes the rise in long-end yields: Will he view it as having already done part of the tightening for the Fed, or will he consider higher term premiums as bringing uncontrollable financial risks? Will he continue to reduce forward guidance, and will he explain how the Fed wants the market to understand its policy reaction function?

Only when these questions receive clearer answers can we judge whether "letting the long end hike for the Fed" is a policy framework Warsh might adopt, or merely a story the market has filled in based on his silence.