DBS Group Research economist Philip Wee notes that the US Dollar (USD) recovered after Fed Chairman Kevin Warsh’s Jackson Hole speech, as futures pricing restored a meaningful probability of a September FOMC rate hike. Wee stresses that Warsh reaffirmed his inflation-first stance and avoided detailed forward guidance, leaving structural long-bond and de-dollarisation risks for the USD still unresolved over the longer term.

Fed signals lift Dollar near term

“The USD regained its composure after Fed Chairman Kevin Warsh’s Jackson Hole speech last Friday. The futures market reinstated the possibility of a Fed hike (58% odds) at the September 15-16 FOMC meeting. Markets latched onto Warsh’s conditional comment that the Fed still has “work to do” if underlying inflation does not move towards 2% “clearly and with sufficient speed.””

“His articulation of broad policy principles should not be confused with the European Central Bank’s more structured framework guidance. Warsh has restored a policy compass, not the decision-making map that markets have been seeking. He remains opposed to forward guidance and again declined to specify a reaction function.”

“Warsh steered clear of the controversy surrounding the overlap between monetary and Treasury debt management. The tension was visible after Jackson Hole. As markets raised the probability of a September Fed hike, yields rose across the Treasury curve.”

“The put refers to Bessent’s August 18 announcement that the Treasury would at least double the maximum size of its long-end buyback operations from $2 billion to $4 billion per operation, effective September 9. The timing creates an awkward gap.”

“For now, the USD benefits from hawkish Fed signals and the cushioning effect of the “Bessent Put.” The greenback’s longer-term structural risks remain intact.”

“Payrolls arrive on September 4, followed by the US Labor Day holiday on September 7, leaving September 8 as a window to test the Treasury before the facility takes effect. Bessent is not necessarily powerless. He could again emphasize the Treasury General Account (TGA), estimated at some $1 trillion.”

“The move was not confined to the policy-sensitive 2Y yield; the 10Y and 30Y yields rose as well. A stronger-than-expected August nonfarm payrolls (+55k consensus vs. -23k previous) this Friday (September 4) could push the 30Y yield back above its August high of 5.34% and test the “Bessent Put.””