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FORWARD GUIDANCE?
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By Jon Turek
The Fed’s annual Jackson Hole Summit is a time honored tradition in the central bank community. Customarily, the Fed Chair delivers a speech, which is closely watched by markets as it is often a tone setter for the final three FOMC meetings of the year.
This year will be Chair Warsh’s first speech and it is coming at a very interesting time. Not only is the new Chair finding his footing in the job, but it is a time of great debate at the Fed. At the July meeting, the central bank decided to hold interest rates steady.
This was meaningful as the market priced in close to a 40% chance that the central bank would hike rates by 25bps, and 3 members of the FOMC dissented against the decision to keep rates on hold, the highest number of dissents since September 2016. So not only is this Warsh’s first Jackson Hole, but it comes at a time when the committee is at odds with how to proceed in the current economic backdrop. This tension came across quite clearly in the minutes of the July meeting that we received last week.
Traditional markets are debating whether tomorrow’s speech will be hawkish or dovish. Will it move the pricing of the September meeting, currently priced at 9bps or 35%?
What is interesting to me now is, on Polymarket we can now trade the speech itself. I.e. Instead of looking for which side of the “family fight” Warsh is on, or if there is a tip at all for the September meeting, we can trade the actual words he is going to say. What is so interesting about this to me is, Warsh is famously not a big believer in forward guidance, as we have seen with his first two FOMC press conferences. This means there is a high chance that the answers the bond market is looking for are not actually present in Warsh’s first Jackson Hole speech.
Nevertheless, Polymarket’s “What will Kevin Warsh say during his speech at Jackson Hole?” has some very interesting options to trade.
These are the type of markets we want to bring awareness to on Polymarket Institutional as they are fundamentally differentiated from traditional markets. And between block trades and organic growth, we expect the depth of these markets to expand.
For macro traders that are laser focused on what Warsh will say tomorrow, these markets offer a very good venue to trade on that directly.
With that said, some of the options listed are:
Task forces 5+ times
Stable 5+times
Too late
Productivity
Independence
Capex
Integrity
Using AI, I built a tracker to help me with the concepts and words that Warsh has used most in his press conferences, congressional testimony and public appearances as Fed chair.
One trade that screens as interesting based on this, and empirically feels right based on watching Warsh’s press conferences closely, is that “task forces” 5+ times at 38% feels too low. Jackson Hole is a venue to discuss big picture topics, and Warsh has come in with a big reform initiative that is highlighted by the work of the task forces he has appointed. I expect a big theme of the speech to be the early findings of these task forces but also what he hopes to accomplish with them in general. I think 5+x below 50% is good EV for something that from a thematic perspective will likely be the main part of his speech.
In terms of markets like September hike, which is a very close call right now on Polymarket, I think there are two key things to be looking at.
A big tension on the committee right now is the debate between the spot data and the balance of risks. The hawks are of the view that the balance of risks around inflation has not improved in recent months, while the doves point to more dovish data on inflation and employment over the last 6-8 weeks. If Warsh gives any indication where on this debate he is, that will be meaningful for the September meeting odds.
Post the July meeting, there has been a lot of pressure on Warsh to actually show the key metrics he is looking at in a way that is different from “forward guidance.” Jackson Hole is a good venue for him to list a few, and the ones he lists will be a sign of where his reaction function is at the moment.
It is Warsh’s first as chair and it is coming at a time of big debate on the FOMC. An interesting angle to play this from is trading on what he is going to say on Polymarket instead of relying on the speech being “impactful” in traditional market terms.
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