Weekly US Bond Market Update: Warsh’s hawkish reset as the Fed prioritizes inflation
The Fed Chair’s Jackson Hole speech triggered a sharp repricing of interest-rate expectations and reinforced the case for selective fixed-income positioning.
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At a Glance
- Warsh’s hawkish reset: Jackson Hole refocused the Fed on persistent inflation, lifting September rate hike expectations from roughly 35% to above 60% and pushing front-end yields higher.
- The AI productivity question: Warsh presented AI as a potential new factor of production that could raise long-run productivity and the economy’s non-inflationary growth potential.
- Nvidia validates the capex cycle: Nvidia’s revenue rose 106% year over year to $96.2 billion, with data-center revenue up 117% and demand still exceeding available supply—reinforcing the strength of AI-related investment.
- Selective fixed income positioning: Attractive yields support carry-oriented allocations, and we believe investors stand to benefit from a preference for securitized assets, taxable municipals and selective emerging-market debt over broad duration exposure and expensive corporate spreads.
Jackson Hole: Warsh’s hawkish reset and the AI factor
After the confusion surrounding his previous press conference, Federal Reserve (Fed) Chair Kevin Warsh used the Jackson Hole Economic Policy Symposium to provide a clearer framework for how he is assessing the economy and inflation. His message was notably hawkish, although he stopped short of committing to a specific policy decision. Markets reacted immediately. As shown in Figure 1, pricing has shifted from expectations, at the start of the year, of nearly 2.5 rate cuts to the anticipation now of more than two rate hikes through early 2027. The implied probability of a September hike rose from roughly 35% to above 60%, while five-year yields moved toward 4.50% and 10-year yields toward 4.75%.
Figure 1: The repricing of rate hike expectations since the start of the year has been driving the rise in short-end rates
Source: Bloomberg, Schroders, as of 8/31/26. Current trends may not persist and offer no guarantee of future outcomes.
Warsh emphasized that inflation—not labor-market weakness—is currently the Fed’s predominant concern. While acknowledging that recent summer inflation readings were better than expected, he said, “[They] do not tell me that underlying trends have meaningfully improved.” He stressed that the Fed will look beyond isolated monthly data points to the trend, breadth and persistence of inflation, as well as inflation expectations, commodity prices and broader financial conditions. With the economy still appearing close to full employment, this Friday’s payrolls report and the September 11 Consumer Price Index (CPI) release will be important tests of whether the recent improvement is continuing at a sufficient pace to avoid a September hike.
The structural AI shift
Separately, perhaps the most interesting and underappreciated part of Warsh’s remarks was his focus on the macroeconomic impact of artificial intelligence. Rather than treating it as a narrow technology story, he framed AI as a potential new factor of production that could raise the economy’s long-run productivity and non-inflationary growth potential. At the same time, he acknowledged that the timing, scale and distribution of those gains remain uncertain and that AI’s longer-term implications should not determine current policy decisions.
Nvidia and the infrastructure boom
Nvidia’s latest results provided further evidence that the AI infrastructure boom remains driven by exceptionally strong demand rather than excess supply. Its quarterly revenue rose 106% year over year to $96.2 billion, with data-center revenue increasing 117%, while management guided to approximately $108 billion in the current quarter. More tellingly, Nvidia indicated that unconstrained demand remains well above what the supply chain can currently deliver. The results reinforce Warsh’s assessment that business investment remains strong—with more than half of this year’s capex growth estimated to be AI-related—and that financial conditions may not yet be sufficiently restrictive. The AI-led capital-expenditure cycle therefore remains an important source of economic momentum, even as investors debate its longer-term sustainability.
Our US Fixed Income Desk view
Fixed income continues to offer attractive value in our view, but positioning must remain selective. With the front end having already priced in a significant probability of additional rate hikes, further policy tightening could paradoxically help stabilize longer-term yields by reinforcing the Fed’s inflation credibility and limiting further expansion in the term premium. We believe portfolios should therefore prioritize income and carry over a broad duration bet. Corporate spreads look increasingly expensive to us, and we think they are offering limited compensation for macro or downgrade risk. By contrast, securitized assets, taxable municipals and selected emerging-market debt continue to offer more attractive relative value, in our opinion, with agency mortgage-backed securities (MBS) and taxable municipals providing particularly compelling sources of carry.
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