Before Kevin Warsh spoke at Jackson Hole, the market put the chance of a September rate rise at about one in three. After the speech it was about two-thirds.
A central bank chief who convinces investors he will not tolerate inflation is normally repaid with lower long-term borrowing costs. Long-term borrowing costs went up instead, in the United States, in Japan and in the United Kingdom at the same time.
"If you say you're not going to raise rates, the market sells off. If you say you are going to raise rates, the market sells off."
Katie Martin is a markets columnist at the Financial Times in London and Rob Armstrong is the paper's US financial commentator in New York, who writes its Unhedged newsletter. They had covered the Treasury's attempt to steady the bond market on the show a few days earlier, and came back to it after the speech that was supposed to fix it.
I listened to the full episode so you can skip it. 22 minutes of audio, 13 minutes of reading.
Here are the 10 takeaways that matter.
🎙️ Hosts: Katie Martin, a markets columnist at the Financial Times in London, and Rob Armstrong, the Financial Times' US financial commentator, who writes its Unhedged newsletter
📰 Published: 1 September 2026 on FT.com (Unhedged)
🟣 Apple Podcasts | 🔗 Episode page | ⏱️ 22 min | ✅ Time saved: 9 min
Key Takeaways
Warsh's first two press conferences unsettled the market rather than settling it He withdrew forward guidance without saying what replaced it, then floated changing the inflation target
The Jackson Hole speech was the correction, and it was hawkish on every point Employment is close to as good as it gets, inflation is too high, and the Fed acts through interest rates
Falling wage growth is not an argument he accepts for lower rates
The odds of a September rate rise went from about one in three to about two-thirds
Long-term borrowing costs rose anyway, which is the opposite of what the speech was for The US 10-year yield reached 4.8%, and the Japanese 10-year hit 3% for the first time since 1996
Martin's explanation is that governments are borrowing more than investors want to fund
Armstrong's is that nominal growth near 7% makes today's yields look low rather than high
The Treasury Secretary says the market is wrong and that he knows something it does not
Stocks have ignored the bond selloff, and how long that holds depends on which explanation is right If borrowing rather than growth is the cause, Armstrong said it is "gonna be a car crash"
1. Two pressers that misfired
Armstrong's account of the two Fed press conferences Warsh held before the Jackson Hole speech, and why he thinks they went badly.
Warsh withdrew forward guidance at the outset and did not say what would take its place. Armstrong said there are good reasons to doubt forward guidance, but that dropping it left investors with no read on his intentions: "However, he wasn't very clear on what was replacing it or what he would be doing or what his other relevant attitudes were."
The remark that did the damage was about the inflation target itself. "And he said a couple of genuinely spooky things like, well, maybe that 2 per cent PCE inflation target is something we could discuss changing in the future, which is not something that a new Fed chair should say." Martin's reply: "Yeah, you don't monkey about with your inflation measures."
Armstrong separated the two things he was judging, and said only one of them was the problem: "So again, I'm quite sympathetic to Warsh's philosophy so far as we understand it. It's a question about execution, which brings us to Jackson Hole, where I think his execution was a lot crisper."
2. Fine with higher yields
Bond prices had already been falling before the second press conference, and Warsh said he was comfortable with that. Martin's summary of the position he took: "That I'm fine if bonds are weaker and borrowing costs are higher because there are various benefits that come with that."
Investors treated it as an instruction. "So the market was like, OK, chief, message received and understood. We're gonna keep selling these bonds because that's what you want us to do."
Armstrong said the position is orthodox on its own terms: "And again, it's perfectly respectable for a Fed chair to say, look, the long end of the yield curve is gonna do what it's gonna do." What made it land badly was the timing, because investors were already unsure what his inflation policy was.
3. Bessent's failed rescue
As the selling continued, Scott Bessent, the Treasury Secretary, stepped in with measures Martin said were meant to "stabilise the bond market", which she read as him telling investors to stop selling because he did not want borrowing costs that high
Armstrong's verdict was that it achieved nothing. "And this worked about as well, for the record, as when I tell my son and his friends to be quiet downstairs while I'm trying to sleep."
Martin agreed: "It didn't go super well."
4. Jackson Hole was hawkish
Martin described the setting before the substance: "This is like the big kind of away day for the real grown-ups in global finance and it's quite an academic event." She said the conference theme was dull enough to be forgettable
Armstrong reduced the speech to three statements and the conclusion they force. Employment is close to full and about as good as it gets; inflation is too high and is not improving; what the Fed does, it does with interest rates. "So if you put those three points together, what you're saying to the market is, unless something changes pretty soon, rates are gonna go up, right?"
The fourth message was that the inflation target is not up for negotiation. Warsh said he would not switch to a different inflation measure or pick a favorite one, and called the current one "a firm fixed target" Martin: "That was just so important for him to get any confusion completely stored away."
Slowing wage growth does not move him. The standard argument for lower rates is that inflation must fall because US wage growth has been falling for a couple of years. Armstrong said Warsh dismissed it: "He was like, nope, this is not a good indicator of future inflation and I'm ignoring it." Martin: "That's another message that rates are much more likely to drift higher than lower from here."
He rejected the weak-jobs reading as well. Armstrong described the "no hire, no fire" account of the US labor market — an unemployment rate he put at "4.1 per cent or something like that", with "nobody's getting fired and nobody's getting hired" — and the conclusion that "The job market is stagnant and therefore weak." Warsh's answer was that the pandemic shock is still working through and that "Companies and workers are relearning how to match."
Armstrong's summary of the whole speech: "And so overall, the package was quite clear and was emphatically hawkish."
5. Odds went 1-in-3 to 2-in-3
Warsh had argued at the second press conference that the Fed should be a referee rather than a player in markets, and Martin said the reaction to his speech disproved it. "I mean, what we've seen in the markets over the past few days since Warsh made this speech absolutely puts that completely stupid thing to rest."
The repricing was large and quick. "So before he spoke, there was about a one in three chance implied through markets that the Fed would raise rates in September." Then: "Now it's about a two-thirds chance that's priced in."
Martin said investors now expect him to act whatever the political pressure, with Donald Trump still calling for lower rates: "He's quite likely to raise interest rates, whatever Donald Trump thinks about it."
The trouble is that neither answer helps the bond market. "If you say you're not going to raise rates, the market sells off. If you say you are going to raise rates, the market sells off."
6. The 10-year hit 4.8%
US borrowing costs reached a level that sets prices well outside the United States. "So the US 10-year yield is now up at 4.8 per cent and this helps to set borrowing costs for everybody everywhere, whether you're a Brit getting a mortgage or you're a German person getting a commercial loan."
The same thing is happening in every other big government bond market. "Yeah, so the Japanese 10-year yield hit 3 per cent today, first time since 1996 which even old duffers like you and I have to admit is a long time ago now." Martin added that "UK yields are at the highest level since the financial crisis", and Armstrong named France and the rest of Europe alongside Japan
Armstrong set out the response the Fed and the Treasury would have wanted, and did not get. Short-term rates, and especially short-term rates after inflation, rise in anticipation of a more active Fed, while 10-, 20- and 30-year yields fall as investors conclude inflation will be controlled. "But while we did get the action at the short end, the long end just keeps on climbing, right?"
7. Governments borrow too much
Martin's explanation is that the market has simply decided to start caring about government borrowing. "But in reality, things don't matter until they do." What it has chosen to care about is the size of the deficits: "And right now, the thing that everybody is obsessively worrying about is just governments are borrowing too much damn money."
Buyers are demanding to be paid more to take the supply. "So governments are leaning really hard on the bond market and the bond market is saying, look, we're not just like a cash machine. You're gonna have to pay us for this."
She said the cause underneath it is political, and that governments "have completely lost their ability to have honest conversations with voters about paying more tax"
Armstrong accepted the shape of the argument, which is that a problem this size does not need a trigger: "I like your point that when something has to happen eventually, it doesn't need a reason to happen at some point or another, right?"
8. The rival explanations
The first is that Warsh is the problem, and Armstrong thinks the evidence is against it. "There is the Warsh at the head of the most important central bank in the world is screwing things up — that's one theory." Against it: "I think the fact that he has straightened things out a bit and yields are still rising cuts against that theory a little bit."
The second is inflation, and the bond market is not pricing it. Armstrong said the inflation rate implied by market prices has risen a little but is still in the range it has held for a long time, and that what investors may be pricing is inflation that moves around rather than inflation that stays high
The third is growth, from Matt Klein's newsletter The Overshoot that morning. Klein's question was why yields were not higher already. "You know, final sales to domestic buyers, which is the kind of GDP without all the nonsense, was like 4 per cent-ish in the last quarterly estimate." On top of that: "You put 3 per cent inflation on top of that, you have 7 per cent nominal growth running around loose in the United States."
The growth story runs straight into the Treasury Secretary, who says the opposite. "He says the market is wrong and yields are too high and they should be lower." Armstrong said the argument Bessent keeps making is that he has information the market does not: "The market has bad information. I have good information." His response was to ask for it: "Like, Scott, dude, if you're listening, it's time for you to tell us what it is that you've got up your sleeve." Martin said Bessent has extended the same claim to Japan: "He said, I know things about Japanese policy that the market doesn't." Her reading was that Japan will act to support the yen and that he knows what is coming
The last theory is that governments are now competing for money with the companies building AI capacity. "I should add one more theory and it's a kind of sub-theory of the growth theory of higher rates, which is sovereign bonds are competing for buyers with the bonds issued by the hyperscalers in massive quantities and that pushes up the going rate of interest." Armstrong said he used to dismiss it: "I have traditionally thought this theory is BS but actually I do think there's something to it, you know." Martin tied it back to growth, on the grounds that much of the growth is arriving as data center construction, so the two explanations describe the same activity
9. Stocks have not noticed
Martin said the equity market's calm is out of character. "But one thing I wonder about all this is it strikes me as quite odd that stock markets are, like, looking at this train wreck that's going on in bonds, and they're sort of, like, rubbernecking and saying, huh, those people in bonds are having a bad time."
Armstrong gave the textbook mechanism for why it should not last. "Normally, when you have higher borrowing costs, that pulls down stocks because suddenly you can get a higher return by buying the bonds, so why bother taking the risk of buying stocks?" He added that the debt-servicing costs of the companies in the index go up at the same time
Martin asked when equities would react: "But so when do you think stock markets get the memo and start puking over this?"
The answer depends on which explanation for higher yields is the right one. If yields are rising because growth will be strong for a long time, stocks and bonds can keep moving in opposite directions. If they are rising because governments cannot stop borrowing, they cannot: "If rates are getting higher because governments can't stop selling debt and can't stop deficit spending, then eventually you're gonna have to choose, do I want a bond with a real rate of 3 per cent or a stock that is meh? And it's gonna be a car crash."
10. Long PR, long the backlash
Armstrong went long public relations, on the strength of how badly the AI industry has handled its own reputation. "I'm long the public relations industry, which is a weird thing for a journalist to say because generally PR people, one of their key jobs is driving journalists crazy." He said he is writing a piece on how that reputation got so bad "They have not told their story in a compelling way."
Martin went long the opposition to data centers, which she said crosses party lines. "It is fierce. Like people on whatever your politics, everyone hates data centres." Her list of objections was that they consume water and electricity and employ few people outside construction, and Armstrong added that they take people's jobs
The money is already borrowed and it is the building that is blocked. "Now they can't get the data centres built because little old ladies in, like, wherever, Ohio, are like sitting in front of the bulldozers and saying, you're not building this thing in my backyard, I'm not having it."
She relayed Trump's line that Americans opposing the construction of AI data centers want to end up "backwards and poor"
Bonus Insights
The hosts did not settle the question and put it to listeners instead, asking whether what is wrong with the bond market is government borrowing or growth
Martin asked for the rule of thumb without the caveats — "Please don't bother emailing in with all the sort of nuance around that." — and Armstrong gave her the caveats anyway, which she said she has enough of: "I get enough mansplainers in my inbox."
The two record from London and New York and were due to appear together at the Financial Times' weekend festival, which Martin offered as a chance for listeners who call them "drooling morons in the comments" to say it in person
Warsh has convinced the market that he is serious about inflation and that the target is safe, and the hosts' bottom line is that it has not helped the bond market, because the thing pushing long-term borrowing costs up is the amount governments need to borrow rather than anything the Fed can settle.
Products, Companies & Tools Mentioned
Federal Reserve (Warsh's Fed, which withdrew forward guidance, floated changing the inflation target, then used Jackson Hole to call the current measure "a firm fixed target")
US Treasury (Scott Bessent's department, which acted to steady the bond market and, Armstrong said, was ignored, and which now says yields are too high)
Books & Resources Mentioned
The Overshoot – Matt Klein (The newsletter whose post that morning argued yields are not high given nominal growth near 7%, and which Armstrong rated the strongest of the theories)
Transcript: Warsh and peace (The Financial Times' own transcript of the episode, linked from the show's notes)
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