Long-term Interest Rates Expected to Rise Again, Dependent on Warsh's Speech Signals

Analyses suggest that long-term interest rates in the United States may come under upward pressure again following the Jackson Hole speech by Kevin Warsh, Chair of the Federal Reserve. If Warsh does not sufficiently explain interest rates and macroeconomic judgments and instead focuses on the agenda of financial innovation, the market may reflect this policy gap through interest rates.

Mitsubishi UFJ Financial Group (MUFG) stated this in a report ahead of Warsh's keynote speech at the Jackson Hole Economic Policy Symposium scheduled for the 28th. George Goncalves, MUFG's Head of U.S. Macro Strategy, remarked, "If there is little policy perspective conveyed to the market this time, the interest rate market may face pressure again."

The Kansas City Federal Reserve is holding this year's Jackson Hole Symposium from the 27th to the 29th in Jackson Hole, Wyoming. The theme is "Financial Innovation: Implications for Payments and Policy." Warsh's remarks are scheduled for 10 AM Eastern Time on the 28th, which corresponds to 11 PM Korean time on the same day.

This year's agenda includes topics such as tokenized finance, payment innovation, and considerations for central bank policies. The Jackson Hole Symposium is an annual event attended by officials from major central banks and economic experts, and the Chair of the Federal Reserve's remarks are typically interpreted as indicators of the interest rate path and monetary policy stance.

MUFG has outlined three potential directions for Warsh's speech: focusing on digital finance, mentioning macroeconomics to some extent, or revealing his monetary policy framework. MUFG believes that if the first path is realized, market disappointment could increase.

Recently, the market has not fully grasped Warsh's policy reaction function. Without additional signals, MUFG analyzes that long-term interest rates could reverse their recent decline and rise back to high levels.

Goncalves pointed out, "The market at least needs to know what to focus on." This implies that even if Warsh does not directly indicate the next direction for the benchmark interest rate, he needs to clarify which indicators—such as inflation, employment, balance sheets, or financial conditions—he prioritizes.

Warsh's communication style has already emerged as a key variable for the market. He has shown a tendency to reduce forward guidance, which is a communication method used by central banks to lower market uncertainty by explaining the future direction of policy interest rates in advance.

Previously, we reported that Warsh's reduction in guidance is related to the debate over the information function of market prices. The issue at that time was that if the Fed provides too much advance guidance to the market, market prices may struggle to function as independent information signals.

MUFG also drew a line on mechanically applying the Taylor rule. The Taylor rule estimates an appropriate level of the benchmark interest rate by incorporating inflation and economic conditions into a formula. MUFG's analysis indicates that if current economic indicators are applied, the federal funds rate should be about 100 to 175 basis points higher than it is now.

One basis point is 0.01 percentage points. However, MUFG believes that directly reflecting this result in policy could pose excessive tightening risks.

Goncalves stated, "If we base it on the Taylor rule, one rate hike would not be sufficient," adding, "If an additional increase of up to 175 basis points occurs from the current rate, the economy could significantly contract or the financial market could face considerable adjustments." This explains the gap between the appropriate rate indicated by the formula and actual policy implementation.

The Fed does not rely on a single formula for actual policy decisions. It considers not only the degree of deviation from inflation and employment targets but also financial conditions and growth trends. MUFG also holds the view that, considering recent economic indicators, there is little necessity for the Fed to raise rates in the near future.

In a forecast released on the 20th, MUFG predicted that the Fed would keep rates unchanged for the remainder of 2026. What the market seeks to confirm in this speech is not just whether there will be a rate hike but what policy judgment criteria Warsh will present.

For Korean investors, this speech is also an opportunity to assess the dollar, U.S. long-term interest rates, and the sentiment surrounding risk assets. U.S. long-term interest rates influence the discount rate for overseas assets and dollar liquidity. We previously reported that the rise in U.S. long-term treasury yields and increased volatility in the bond market have been cited as factors burdening risk assets.

This does not provide a definitive basis for determining the price direction of virtual assets such as Bitcoin (BTC) and Ethereum (ETH). However, if long-term bond volatility increases, it could affect the trading sentiment of risk assets as a whole. Warsh's keynote speech at Jackson Hole is scheduled to begin at 11 PM Korean time on the 28th.

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