Where to next on interest rates? Warsh, Bessent point in opposite directions.

After weeks of being criticized for a lack of clarity, Federal Reserve Chairman Kevin Warsh showed his hand, at least a bit, to an uneasy bond market that he is trying to reform.In his first major policy speech, Mr. Warsh said Friday that the labor side of the economy was reasonably strong but that inflation had not yet been tamed. He laid out many of the signals he pays attention to. But he left it to markets to translate.The markets’ conclusion: A hike in interest rates – which can affect everything from business loans to mortgages – is increasingly likely in September. Importantly, at least to Mr. Warsh, Treasury bond yields barely moved in the immediate aftermath of his speech at the annual gathering of central bankers and policymakers in Jackson Hole, Wyoming. Why We Wrote This While Treasury Secretary Scott Bessent seeks to lower interest rates a bit, Kevin Warsh at the Federal Reserve, tasked with fighting inflation, might have to raise short-term rates. That, in turn, could push up rates on business and consumer loans. “A quieter Fed, a more purposeful Fed in its communications, is better able to meet its objectives,” he said. If instead the central bank is making decisions based on markets and markets are making calls based on Fed signals, then both are likely to miss new developments, a classic “hall of mirrors problem,” he said.Contrasts in philosophy and actionMr. Warsh’s retreat from years of increasingly open communication from the Fed stands in sharp contrast to actions by Treasury Secretary Scott Bessent last week.Bonds are the sleepy corner of the markets, with yields typically moving a few hundredths of a percentage point. But after the yield on 30-year Treasury bonds jumped a full one-tenth of a percentage point in the space of two trading days, reaching a 19-year high, Secretary Bessent intervened.Arguing that markets were temporarily out of whack, he announced on Aug. 19 that the U.S. Treasury would at least double its purchase of long-term government bonds for a two-month period starting Sept. 9. By using short-term debt to buy long-term debt, Mr. Bessent was able to bring down long-term rates a little. (Even when financing hundreds of billions of government debt, such modest changes can prove significant.) Julia Demaree Nikhinson/AP Treasury Secretary Scott Bessent speaks at a news conference Aug. 24, 2026, at the Treasury Department in Washington. Mr. Warsh’s restraint and Mr. Bessent’s interventionism have sparked plenty of criticism. They also contrast the outlook of the two point men for the U.S. economy. If Mr. Bessent is moving to lower interest rates while Mr. Warsh is sounding increasingly ready to boost them, will they be able to work together to bring down inflation?There’s a difference, of course. Mr. Bessent is working on long-term interest rates, while Mr. Warsh and the Fed control only short-term rates. But the two rates are related, and Fed policy over time tends to affect long-term rates.Fix or falter?Both Mr. Bessent’s intervention and Mr. Warsh’s lack of guidance on the Fed’s thinking are controversial. Many economists and market players argue that the real reason long-term yields rose is that traders are increasingly worried that America’s burgeoning debt is undermining its financial credibility. On Aug. 19, the same day Secretary Bessent intervened, total U.S. government debt crossed the $40 trillion mark, double the level of a decade ago.“The long-term Treasury yield is the most important price in the world,” Stanley Druckenmiller, billionaire investor and former hedge-fund manager, wrote in an Aug. 24 op-ed for The Wall Street Journal. By interfering with that price, Mr. Bessent is trying to tamp down the market’s reaction to America’s increasing indebtedness, he argued. “Governments defending prices against fundamentals always lose.” (The personal ties are also interesting: Both Mr. Bessent and Mr. Warsh were protégés of Mr. Druckenmiller.)Mr. Warsh has also come under fire for reversing years of the Fed’s increasingly transparent communication, which began in the wake of the 2008 financial crisis.“It was essential at the time,” he said in his Friday speech, noting that as a Fed governor then, he endorsed the measure, often referred to as “forward guidance.” But “the practice has outstayed its welcome. ... We inhibit our own freedom to make the right calls when it’s time to decide.Pros and cons of silenceBut many Fed watchers say that by saying nothing, the central bank encourages markets to speculate about its intentions. That speculation can lead to more volatility – not less.“Warsh needs to convince financial market participants and other Fed watchers that he has a method for how he is going to form his views,” David Wilcox, senior fellow at the Peterson Institute for International Economics and former economist with the Fed, writes in an email to The Monitor.There is a middle ground, says David Andolfatto, former senior vice president in the research division of the Federal Reserve Bank of St. Louis and now chair of the economics department at the University of Miami.“A contingency plan should replace forward guidance,” he says. Instead of saying what’s likely to happen, which no one can really know, central bankers can reveal what they would do under particular circumstances.In his speech, Mr. Warsh didn’t go that far.But he did make clearer what market signals he watches to decide where the economy is headed.