Strategists at Bank of America (BofA) said that Federal Reserve Chair Kevin Warsh's speech at the annual Jackson Hole symposium could help flatten the U.S. Treasury yield curve, boost demand for risk assets, and support the dollar, if Warsh can signal policy appropriately. The BofA strategist team, led by Michael Hartnett, noted in a report that if Warsh wants a positive outcome for markets, he will need to reinforce the Fed's credibility in fighting inflation to keep short-term bond yields in check, while signaling support for Treasury Secretary Scott Bessent's efforts to control long-term borrowing costs. However, if Warsh's policy signaling turns out to be a failure, U.S. Treasury yields could surge above levels seen before Bessent signaled plans to buy back long-term government bonds in early August. Such a scenario could pressure the dollar and make defensive stocks more attractive than cyclical stocks, as well as other assets sensitive to rising long-term bond yields. Warsh's address comes at a delicate time for investors, as he has previously been criticized for providing limited details on how he would bring inflation back to the Fed's 2% target. Meanwhile, investors remain confident in the stock market, even as U.S. long-term borrowing costs have surged to levels not seen in about two decades, and the S&P 500 is less than 1% away from its record closing high. Recent fund flows have begun to reflect caution, with BofA citing EPFR Global data showing $4.4 billion flowed out of U.S. stocks in the week ending August 26, the first outflow in five weeks. Meanwhile, funds flowed into Japanese equities, and investment-grade bonds saw inflows for a 21st consecutive week, as investors watch whether Warsh can balance maintaining credibility on inflation control with managing long-term borrowing costs.
Bank of America CorpBofA strategists analyze Fed speech impact on yields and dollar, affecting bank's outlook indirectly.
