Market data as of August 31, 2026.

Executive summary

  • Fed Chair Warsh struck a decisively hawkish tone at Jackson Hole, reaffirming the 2% PCE target as a firm, fixed target and signaling that additional rate hikes remain on the table. Markets responded immediately, with the probability of a September hike jumping from 36% to 68%.
  • Rising long-term yields are becoming a key risk to the equity rally. The 10-year Treasury has climbed from 4.17% to 4.75% year-to-date, and Treasury Secretary Bessent's yield curve management initiative involves buying longer-dated bonds financed by short-term issuance. We view this as a temporary measure that does not address the underlying U.S. fiscal challenges.
  • U.S. fiscal dynamics remain a structural concern. National debt has crossed $40 trillion, and net interest payments have risen to 3.3% of GDP from just 1.3% in 2021, significantly reducing the government's flexibility in a potential downturn.
  • Nvidia's results reinforced the durability of the AI investment cycle, with revenue of $96.2 billion beating estimates by ~5% and forward guidance of ~70% growth roughly doubling consensus expectations. AI remains one of the strongest drivers of earnings growth and one of the largest sources of capital demand.
  • We are watching for an emerging tension between Fed and Treasury policy. With the Fed keeping short-term rates elevated to combat inflation while the Treasury works to suppress long-term yields, the direction of long-term rates may ultimately matter more to risk assets than the Fed's next move.

Jackson Hole: Warsh resets expectations

The last week of August traditionally brings the Federal Reserve’s annual Jackson Hole Symposium. The Federal Reserve Chair typically uses this forum to communicate the direction of monetary policy and provide insight into the Fed’s thinking on the economy and inflation.

In his first Jackson Hole appearance as Chair, Kevin Warsh struck an extremely hawkish tone, signaling a more forceful approach to combating inflation. Warsh emphasized that underlying inflation trends have not meaningfully improved. With inflation “running above our 2% target,” he stated that “the Fed’s predominant focus right now should be on prices.” Warsh described the inflation data as “concerning” and noted that “we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we [the Federal Reserve] have work to do. That’s our job….our mandate…and our charge to keep.”1

Warsh also walked back some of the more dovish commentary from the most recent Fed meeting.

First, regarding the Fed’s inflation target, Warsh stated, “There should be no misunderstanding. The Fed’s price-stability objective of 2%, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target.” This appeared to contradict his previous commentary that he would be satisfied with PCE inflation in the 2% range.2

Second, regarding the tools available to achieve the inflation objective, Warsh stated that “short-term interest rates are the predominant tool to achieve the dual mandate.”3

Finally, regarding economic activity and financial conditions, Warsh commented that he “would be hard-pressed to describe broad financial conditions as restrictive.”4

Warsh’s comments had a significant impact on both interest rates and risk assets. According to the CME FedWatch Tool, the probability of a September rate hike rose from 36% to 68%, while the probability of a rate hike by the December meeting increased from 75% to 89%.5

Bond yields moved higher, particularly at the short end of the curve. The 2-year Treasury yield rose 11 basis points, while the 10-year yield increased by 4 basis points. Gold declined 3.1%, while the equity market reaction was relatively muted, with the S&P 500 falling 0.25%.

Yield curve management: A temporary fix

Of particular concern has been the rise in long-term Treasury yields. The 10-year yield has risen from 4.17% to 4.75% year to date, while the 30-year yield has increased from 4.85% to 5.25%.

We have been concerned that rising long-term yields could ultimately become a headwind for the equity rally. We are not alone in watching this closely. On August 19, Treasury Secretary Scott Bessent announced plans to increase purchases of longer-dated Treasury securities by issuing additional short-term debt. The Treasury plans to increase purchases at the long end of the curve, defined as maturities of 10 years or longer, from $2 billion to $4 billion beginning September 9.6

Questions have emerged as to whether this should be considered a form of Quantitative Easing (QE). Because the overall supply of Treasury securities remains neutral, with purchases of longer-dated bonds financed by the issuance of short-term debt, this does not meet the traditional definition of QE. The Treasury also does not have the authority to create money; that authority resides with the Federal Reserve. As a result, we believe this is better viewed as an attempt at yield curve management. In our view, the Treasury is attempting to influence the cost of long-term capital without actually changing the amount of outstanding debt.

Whether yield curve management can ultimately be successful remains to be seen. We remain skeptical because this approach does little to address the underlying fiscal challenges facing the U.S.

We have been concerned about the deteriorating U.S. fiscal situation as government spending remains elevated relative to revenues. U.S. national debt has now crossed $40 trillion, while projected net interest payments have risen to 3.3% of GDP, compared with just 1.3% in 2021. This growing interest burden could provide the government with increasingly limited flexibility in the event of an economic downturn.7

Currently, the 10-year and 30-year Treasury yields are approximately 5 basis points above and 4 basis points below, respectively, their pre-announcement levels (as of August 31st). Even if successful, yield curve management would provide only a temporary response to a deteriorating fiscal situation.

Persistent inflation, increasing deficit spending, and unfavorable debt dynamics have created a structural increase in the cost of capital for government borrowing. At the same time, the AI investment boom is creating substantial private sector demand for capital. The combination of historically large government borrowing needs and accelerating private sector investment could create structural upward pressure on the cost of capital. In our view, suppressing yields through $4 billion Treasury purchases does not address these underlying issues.

Fiscal discipline does not appear to be a near-term priority given the current political climate. However, we anticipate that fiscal policy and the sustainability of government debt will become increasingly important topics during the upcoming election cycles.

Nvidia: The AI cycle remains resilient

We would be remiss not to mention Nvidia’s earnings, given that the company is often viewed as the bellwether for the broader AI trade.

In the most recent quarter, Nvidia reported revenue of $96.2 billion, exceeding consensus expectations by approximately 5%. Earnings of $2.46 per share also exceeded the $2.07 consensus estimate.8

However, we believe it was the company’s forward guidance that drove the stock 8.7% higher the following day. Nvidia projected revenue growth of approximately 70%, significantly above consensus expectations of roughly 40%, despite ongoing supply constraints.9

One thing is increasingly clear: the influence of artificial intelligence on the broader market does not appear to be dissipating anytime soon. The paradox is that the AI boom remains one of the strongest sources of earnings growth in the market, while simultaneously becoming one of the largest sources of demand for capital. For equity investors, the longer-term question is whether the returns generated by this investment cycle will justify the enormous amount of capital required to fund it.

What we are watching

We will be closely watching the next set of inflation data, with PPI due September 10 and CPI due September 11, just ahead of the September 15–16 Federal Reserve meeting.

More importantly, we are watching for signs of an emerging policy tension between the Federal Reserve and the Treasury. With the Fed focused primarily on combating inflation, short-term rates could remain higher for longer, while the Treasury is simultaneously seeking to contain long-term yields.

This divergence could become increasingly important for investors. If the Fed remains focused on inflation while fiscal policy continues to generate substantial borrowing needs, suppressing long-term yields may prove increasingly difficult. At the same time, continued AI investment could add further demand for capital.

In our view, the direction of long-term interest rates may ultimately prove more important to risk assets than the next move in short-term rates.

Chart showing commodity performance for year to date, one year, one month, and three months.
Chart showing recent global equity indices and their recent performance as of the end of August 2026.
two row chart showing crypto performance for Bitcoin and Ethereum as of the end of August 2026
chart showing FX as of the end of August 2026

References:

  1. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
  2. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
  3. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
  4. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
  5. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
  6. https://home.treasury.gov/news/press-releases/sb0607
  7. Bloomberg News, August 19, 2026
  8. Nvidia Earnings Call, August 26, 2026: https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-second-quarter-fiscal-2027
  9. Nvidia Earnings Call, August 26, 2026: https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-second-quarter-fiscal-2027

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