Dollar and bond markets 'on edge' ahead of Jackson Hole as Bessent's market intervention piles pressure on Warsh

Central bankers, policymakers and economists will gather in Jackson Hole, Wyoming, on Thursday for the Federal Reserve Bank of Kansas City's annual economic policy symposium. Markets are closely monitoring the event for Fed Chair Kevin Warsh's keynote speech after long-term borrowing costs hit a near-two-decade high last week and the Treasury's bombshell bond market intervention.

Warsh is due to speak at the event on Friday, with market watchers expecting what he says — or doesn't say — to shape investors' expectations for Fed policy and potentially trigger trading activity. Last week, the U.S. Treasury Department announced it would increase its buybacks of long-term government debt, saying it would at least double the maximum size of its repurchasing operation to $4 billion from Sept. 9.

The move, which some investors and analysts interpreted as an effort to lower U.S. government bond yields, helped curb a sell-off that had gripped bond markets in the preceding days. That stress in the market saw the yield on the 30-year Treasury note surge to a 19-year high, amid mounting concerns about inflation and the U.S. fiscal deficit.

But U.S. Treasury Secretary Scott Bessent's plans came under fire from some prominent market watchers, who said increasing the buybacks could put pressure on the economy, complicate the Federal Reserve's inflation fight and intensify political pressure on the independent central bank. Inflation remains above target, with data published Wednesday showing the personal consumption expenditures price index — the Fed's preferred inflation gauge — rose 3.7% in the year to July.

In a note on Wednesday, Bank of America FX strategists said the U.S. dollar was "on edge" ahead of Jackson Hole, with the greenback vulnerable to an extended sell-off if Warsh "disappoints markets." Since the Fed's last Federal Open Market Committee meeting in July, the partial unwinding of long positions in the U.S. dollar has been a key theme in foreign exchange markets, according to BofA analysis.

In an earlier note, strategists at the investment bank had labeled Jackson Hole a "key risk event" for both bonds and the dollar. They said that, following the Treasury's bond market intervention, the Fed can "also do its part" to help contain long-end Treasury yields either by taking a more hawkish policy stance, or by giving clearer guidance on the inflation outlook and its reaction function.