Key Questions: Is Kevin Warsh having an “Alan Greenspan Moment?"

Nearly four decades ago, a newly installed Federal Reserve chairman inherited an economy following a significant monetary easing cycle. Inflation had fallen dramatically from its earlier highs, but concerns were beginning to resurface. Bond yields were rising; the dollar was under pressure; and financial markets wanted reassurance that the new Fed chairman would protect the central bank’s hard-won, inflation-fighting credibility. The year was 1987. The chairman was Alan Greenspan.

Sound familiar? (Note to our readers: The comparison merely pertains to monetary policy and the challenge of preserving Fed credibility. It is not intended to suggest that the market turmoil that occurred in 1987 is destined to repeat.)

The Road to Greenspan

By the mid-1980s, Paul Volcker had largely accomplished what once seemed nearly impossible: breaking the back of inflation that defined the late 1970s and early 1980s.

With inflation substantially lower, monetary policy eased. The Fed’s discount rate was reduced repeatedly, eventually reaching 5.5% in August 1986, down from 14% five years earlier. But by 1987, the backdrop was changing. Economic growth remained firm, the dollar weakened, and inflation concerns were reemerging. Treasury yields moved higher as investors demanded greater compensation for inflation and interest rate risk.

Then came another source of uncertainty: a leadership change at the Federal Reserve.

On June 2, 1987, President Ronald Reagan announced that Alan Greenspan would succeed Volcker as Fed Chairman. Markets reacted immediately. Stocks declined, the dollar weakened, and bonds sold off. The yield on the 30-year Treasury jumped to 8.92% from 8.71%, and investors were asking a simple but important question: Would the new chairman be as committed to price stability as Paul Volcker had been?

A New Chairman Meets the Bond Market

Greenspan took office in August 1987. Less than a month later, the Fed acted. On September 4, the Federal Reserve raised the discount rate from 5.5% to 6.0%, its first increase in more than three years — citing the need to address potential inflationary pressures. The move was about more than 50 basis points. It sent a message. The new chairman was willing to tighten. Greenspan was establishing his inflation-fighting credentials amid a skeptical bond market. And that is where 1987 begins to look surprisingly relevant to 2026.

Enter Kevin Warsh

Kevin Warsh also assumed leadership of the Federal Reserve following an easing cycle. The circumstances are different, but the questions are familiar. Inflation remains above the Fed’s 2% target. Long-term Treasury yields remain elevated. And investors are trying to determine how forcefully a new Fed chairman will respond. Those questions became apparent this summer. The Fed left its target interest rate range unchanged at 3.50% – 3.75% in July, but bond investors continued to wrestle with persistent inflation, heavy government borrowing, and whether monetary policy was sufficiently restrictive. That highlights one of the more counterintuitive realities of monetary policy: Sometimes the path to lower long-term interest rates begins with higher short-term rates.

If investors believe the Fed is unwilling to tighten sufficiently today, they demand greater compensation for holding longer-term bonds tomorrow. Inflation risk and term premiums can rise, pushing long-term borrowing costs higher even when the Fed leaves its overnight rate unchanged. In other words, the bond market can tighten financial conditions for the Fed — but not necessarily in the way policymakers would prefer.

What the Labor Market Does, and Does Not, Say

The August employment report adds an important new dimension to this debate. Nonfarm payrolls increased by 162,000 in August, nearly three times consensus expectations of roughly 55,000, while the unemployment rate held at 4.1%. Private payrolls increased by 127,000, labor-force participation edged higher to 61.6%, and prior months were revised higher. That matters because July’s initially reported decline in payrolls had raised an uncomfortable question for the Fed: Was the labor market beginning to weaken to obviate additional tightening? For now, the answer is no.

The report does not signal an overheating labor market. Wage growth remains contained relative to earlier in the cycle, with average hourly earnings up 0.3% in August and 3.1% over the past year. One strong month also does not erase the broader moderation in hiring that has developed over the past year. But neither does the report provide evidence of the kind of labor market deterioration that would force the Fed to look past inflation. Instead, it gives Warsh something increasingly valuable: flexibility.

A labor market that is still generating jobs, with unemployment holding near 4%, gives the Fed greater latitude to remain focused on price stability — and potentially to tighten further if inflation fails to move convincingly toward the Fed’s target. Markets responded accordingly. Treasury yields moved higher following the report as investors increased the probability of additional Fed tightening. That reaction is important. The August report did not simply beat expectations. It challenged the idea that weakening employment might prevent the Warsh Fed from acting on inflation.

Jackson Hole: Warsh’s Credibility Moment?

At Jackson Hole, Warsh appeared to acknowledge the challenge. He called the Fed’s 2% inflation objective a “firm, fixed target” and said the central bank’s predominant focus should be on prices. With inflation still running above target, Warsh added that unless underlying inflation is clearly moving toward 2% at sufficient speed, “we have work to do.” Markets heard the message. Expectations for a September rate increase rose sharply following the speech. Warsh didn’t raise rates at Jackson Hole, but he changed the market’s perception of how he might respond to persistent inflation. The August jobs report now strengthens that message.

If Jackson Hole established Warsh’s willingness to defend the inflation target, the employment report potentially gives him more room to do it. And that may be the most important parallel with Greenspan. In 1987, the bond market wasn’t merely forecasting Federal Reserve policy. It was testing the resolve of a new chairman. The same may be happening today.

History Doesn’t Have to Repeat to Rhyme

There are important differences between 1987 and 2026. The 1987 episode was heavily influenced by the declining dollar, international currency coordination, and concerns that currency weakness would reignite inflation. Today’s Treasury market faces a different mix: persistent inflation, substantial government borrowing, heavy Treasury supply, questions about the neutral policy rate, and potentially higher term premiums. But the underlying mechanism looks increasingly familiar:

1987: Monetary easing → renewed inflation concerns → leadership transition → bond market questions the new chairman’s resolve → Fed tightens to reinforce credibility.

2026: Monetary easing → inflation remains above target → leadership transition → bond market questions the new chairman’s resolve → Warsh signals that additional tightening may be necessary → a stronger labor market gives the Fed room to act.

And there is another similarity worth considering. Higher short-term rates do not necessarily mean higher long-term yields indefinitely. If investors become convinced that the Fed is willing to do what is necessary to contain inflation, inflation expectations and term premiums can ultimately decline. In that sense, additional tightening at the front end can eventually help restore confidence farther out the Treasury curve. That process does not have to happen immediately. Indeed, Treasury yields rose following the August employment report as markets repriced the near-term policy path. But the longer-term question is different. Will investors eventually conclude that a Warsh Fed willing to tighten today increases the probability of lower inflation — and therefore lower long-term yields — tomorrow? That is where the Greenspan comparison becomes particularly interesting.

Is Kevin Warsh Having an Alan Greenspan Moment?

Perhaps. The lesson from 1987 isn’t that history must repeat, or that Treasury yields are destined to follow the same path. It is that a new Fed chairman sometimes must demonstrate his inflation-fighting credibility before the bond market is willing to grant it. Greenspan did so with action. Warsh began with words at Jackson Hole. Now the August employment report has removed at least one potential obstacle to following those words with policy. The next test is inflation.

If price pressures remain stubborn while employment remains resilient, the case for additional tightening becomes considerably stronger. If inflation resumes a convincing move toward 2%, Warsh may have the luxury of patience. Either way, the question confronting markets has changed. It is no longer simply whether the Fed can raise rates without damaging the labor market. It is whether a willingness to raise rates today could ultimately be what allows long-term rates to fall tomorrow.

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