Investors have cheered the Fed chair's speech over the past three years, but there's reason to think that this year will be different

Investors are anxiously awaiting Fed Chairman Kevin Warsh's speech on Friday.

The stakes for the stock market are high as Federal Reserve Chairman Kevin Warsh prepares to deliver his first Jackson Hole speech since taking the helm at the U.S. central bank.

Top central bankers tend to use the annual economic symposium hosted by the Federal Reserve Bank of Kansas City to set market expectations for monetary policy as fall approaches. More often than not, particularly in the past three years, Wall Street has cheered their message. But there's good reason to think that this year might be different.

A desire to listen more to the market and to say less has been Warsh's signature stance since arriving at his new post in May. And bringing inflation back down to the Fed's 2% annual target has been another top focus of his, albeit with too few details for Wall Street's liking.

The information void has investors feeling empty-handed. With the S&P 500's SPX choppy path since its record high two weeks ago and the bond market's tantrum after Warsh's second press briefing in July, more tumult could be in store on Friday.

So how high are the stakes for Warsh's speech? "I think they are quite big," said Jason Vaillancourt, chief portfolio strategist at Columbia Threadneedle Investments.

"I don't think anyone knows what Kevin Warsh's guiding operating principles are," he said. "I don't have a great sense of whether he understands how much the market is craving that kind of information."

Wall Street is still getting familiar with Warsh's curt style and dislike of providing forward guidance. This follows eight years when the central bank was led by Jerome Powell, who presided over the Fed's pandemic response.

In 2022, Powell shocked investors with a blunt Jackson Hole speech that warned of potential job losses and economic pain as the central bank looked to intensify its battle against inflation.

The S&P 500 tumbled 3.4% on the day of Powell's speech and was down 9.92% a month later, as the below chart from Dow Jones Market Data shows. That marked the stock market's worst performance in a decade of keynote addresses by the Fed chair at the symposium.

The stock market swooned in 2022 after Jerome Powell's brief, blunt speech at the Jackson Hole economic symposium.

Beyond that, 2022 ended up being a year of historic losses in both stocks and bonds as the Fed kept raising interest rates to fight inflation that at midyear still was above a 6% annual rate.

The Fed's main inflation gauge for setting interest rates in July was at a 3.7% yearly rate.

Uncertainty around how the Fed expects to get inflation back to 2% has been a factor in this summer's bond-market selloff, which in August saw the 30-year Treasury yield BX:TMUBMUSD30Y hit its highest level since 2007, prompting the Treasury Department to intervene.

The odds on Thursday favored no change to rates at the central bank's September policy meeting but were tilting toward one hike by December's meeting, according to the CME FedWatch Tool.

Beyond what the Fed might do with rates, the focus has been on the rising cost of capital, supply pressures resulting from the borrowing binge of "hyperscalers" in the artificial-intelligence race and the U.S. national debt reaching $40 trillion.

Treasury Secretary Scott Bessent has several ways he could try to impose his will on the bond market and bring down borrowing costs, including his plans to buy back more long-dated bonds starting in September.

It isn't clear if that will be enough. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y was near 4.66% on Thursday, modestly down from recent highs but still well above its 4% level in March, at the start of the Iran war.

Warsh's speech, which is expected to hit this year's theme of financial innovation, might leave the subject of the Treasury's recent intervention untouched. Yet the AI build-out increasingly has been a linchpin of both U.S. stocks and the bond market. As yields pushed higher in August, the bond market called the tune for stocks.

"I'd expect a fairly short speech," said Steve Sosnick, chief strategist at Interactive Brokers, adding that there still are a lot of "unanswered questions."

In 2008, then Fed Chair Ben Bernanke started the bond-buying program known as "Operation Twist," which subsequently provided a stimulus boost for the U.S. economy. The Treasury Department's bond buybacks under Bessent are far more limited but presumably could still be stimulative, Sosnick said.

With inflation still a problem, that raises the question of whether the Treasury and the Fed are working at cross purposes, according to Sosnick.

"If this were a press conference, that would be question one," he said. "But he's pretty much free to say, or not say, whatever is on his mind."

-Joy Wiltermuth