Client Update - 7th August 2026

As is often the case in the summer when market liquidity is at its lowest, volatility has increased as markets have reacted nervously to the early weeks of Kevin Warsh's tenure as Chair of the US Federal Reserve (Fed). This has masked what has been a pretty good earnings season for the hyper-scalers (Microsoft, Amazon etc) who are spending billions of dollars on AI development. In the recent Fed policy meeting, Warsh provided very limited guidance on the future direction of interest rates. Investors were looking for reassurance about how the Fed would respond to rising inflation pressures, partly linked to higher energy prices following US involvement in the Iran conflict. Instead, Warsh's restrained communication style contributed to a sharp rise in long-term US government bond yields and brought concerns that US interest rates would rise and constrain global growth potential.

The increase in bond yields reflects concerns that the Fed may not be doing enough to convince markets it remains committed to bringing inflation back to its 2% target. US inflation currently stands at 3.7%, well above that objective.

Warsh's approach marks a significant departure from previous Fed leaders such as Jay Powell, Janet Yellen and Ben Bernanke. Those predecessors regularly provided detailed "forward guidance" about likely future policy moves. Warsh has long argued that this can be counterproductive, limiting a central bank's flexibility and encouraging markets to focus excessively on official commentary rather than economic data.

His strategy is to communicate less and allow economic data to drive market expectations. While supporters believe this could reduce policy mistakes and improve the quality of market signals received by policymakers, critics argue that the lack of guidance risks creating uncertainty and unnecessary market volatility. It is hard to wean markets off what they have become used to.

Most importantly, Warsh's comments suggest he remains prepared to raise interest rates if inflation data over the coming weeks remains elevated. Markets are currently pricing in roughly a 55% probability of a quarter-point rate increase at the Fed's September meeting. If rates rise, there is less liquidity in the market and growth may be harder to come by.

For our portfolios, the key takeaway is that US monetary policy may become less predictable in the short term. This could lead to greater volatility in global bond and equity markets. However, the Fed's underlying objective remains unchanged: bringing inflation back towards 2% while maintaining economic stability. Much attention will now focus on Warsh's upcoming speech at the Jackson Hole symposium, where he is expected to provide greater insight into his long-term policy framework and leadership approach. For now, markets and therefore portfolios remain relatively robust, so I trust you will have a good weekend.