Short-dated Treasury yields jump as Warsh flags inflation concerns

Federal Reserve Chairman Kevin Warsh cautioned about rising inflation risks during his inaugural address at the Jackson Hole economic conference. Despite recent inflation measures being better than expected, Mr Warsh stated that they do not indicate significant improvements in underlying trends. He emphasized that the Fed must be confident that inflation will move towards its target at a sufficient pace.

While not providing forward guidance, Mr Warsh noted that certain sectors like housing and agriculture are facing strains. He also mentioned that he would find it challenging to describe overall financial conditions as restrictive. Markets interpreted his remarks as a possible indication that the Fed might not be done with its efforts to combat inflation.

The two-year Treasury yield surged over 8 basis points to 4.317 percent during his speech, while bond markets reacted cautiously with increased inflation fears fueled by the ongoing Iran conflict and the US national debt surpassing $40 trillion. Treasury Secretary Scott Bessent previously announced plans to double the size of the department's buyback program from $2 billion to $4 billion, but Mr Warsh did not mention this initiative in his speech.

Data from last week revealed that PCE inflation remained steady in June, increasing by 3.7 percent on an annual basis, while core inflation rose by 3.3 percent year-on-year, as expected. Minutes from the Federal Reserve's July meeting indicated that officials were becoming increasingly cautious about inflation, as the Fed held rates steady at around 3.6 percent in a 9-3 vote.

Other US central bankers echoed hawkish sentiments, with regional Fed presidents advocating for rate hikes and the Boston Fed President expressing support for action if inflation does not moderate at her preferred speed.