Kevin Warsh Asked the Market to Speak. It Answered. -- WSJ

By Nick Timiraos

Kevin Warsh has staked his chairmanship on the premise that a quieter Federal Reserve gets a cleaner read on what investors think. On Wednesday, he said it was working.

At a news conference after the Fed held interest rates steady, he pointed to how nominal and inflation-adjusted Treasury yields had risen since his debut meeting in June, among the largest moves between meetings in two decades. He said markets were responding to the economy rather than to the Fed, which was evidence that his pullback from doling out guidance was working. Pressed later on why he hadn't acted on his inflation pledge by raising rates, he suggested those higher borrowing costs were doing some of the work of a rate increase the Fed hadn't had to make.

Over the next hour, investors said otherwise. The 30-year bond yield jumped to 5.2%, the dollar weakened and stocks fell -- a combination that points to worry about inflation rather than confidence in growth. Market-based measures of expected inflation over coming years rose, said Mark Cabana, head of U.S. rates strategy at Bank of America.

"This is a classic central-bank credibility shock," said Cabana. The long bond and stocks turned together at roughly 3 p.m., while Warsh was still speaking.

Investors had priced in nearly two increases over the next 12 months. What they heard Wednesday was a chairman whose willingness to deliver them they now doubt.

Economists pointed to three things Warsh said that unsettled investors. Asked what inflation measure he relies on, he affirmed the Fed's official gauge, the personal-consumption expenditures price index, but then left room to look beyond it when he said his own lens is broader and that the central bank's overarching strategy statement, which lays out how it targets inflation and which it reissues each January, could change.

Asked whether higher rates were the remedy for inflation that won't come down, he said they "could well be part of that solution" but wouldn't say they were the main one. And he suggested the market's own tightening had done some of the Fed's work.

Three of his colleagues concluded the Fed couldn't outsource that work any longer. Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas voted to raise rates. Warsh treated the split as a feature. "I asked for a good family fight, and I got one," he said.

Three dissents in the same direction is rare; a fourth or fifth dissent on the 12-person committee would be without precedent in the modern era. The Fed next meets Sept. 15-16.

Wednesday's market reaction could add urgency for the rest of the committee -- with or without Warsh -- to push for higher interest rates this year, said Michael Feroli, chief U.S. economist at JPMorgan Chase. He moved forward his forecast for the next rate increase to December from the second half of 2027, with September as a risk if inflation is hotter this summer.

Bank of America expects the Fed to hike three times this year, beginning in September. "If you actually want to get long-end rates down, there's an argument that you need to raise front-end rates right now in order to establish that credibility," said Cabana.

Krishna Guha of Evercore ISI said his base case remains that Warsh narrowly avoids an increase in September, though he described it as a knife-edge call. If the Iran war and energy prices don't allow inflation to keep improving over the summer, he said, Warsh will be called on his tough talk -- facing as many as six dissents and pressure from the bond market -- and will have to move or lose credibility.

Warsh has his reasons for saying less. Providing rolling commentary and forecasts, he said, would "fog up" a useful source of information from financial-market signals. "We're just trying to make sure that that source of information is as direct and unfiltered as possible," he said.

His account rested on two propositions: that markets in recent weeks had been pricing events rather than the Fed, and that the tightening those yields delivered was a sign of confidence the central bank could bring inflation down. Both drew objections.

On the first, the Fed hadn't been entirely quiet. In the weeks before the meeting, half of the voting members of the rate-setting committee, including two who dissented Wednesday, laid out their views publicly. The higher yields Warsh pointed to partly reflected Fed governors and reserve-bank presidents explaining what would prompt them to raise rates, said Diane Swonk, chief economist at KPMG. Even if the chairman offered less guidance, "there was lots of Fed guidance," she said.

On the second, the comfort Warsh drew from higher yields sat awkwardly with part of why they had risen. Oil prices climbed after fighting between the U.S. and Iran resumed, pushing up investors' expectations for inflation, which isn't a source of reassurance for central bankers promising to bring it down.

Loretta Mester, who spent a decade voting on Fed policy as president of the Cleveland Fed, cautioned against reading much into a single session's price action. She came away from the news conference thinking Warsh was more open to raising rates later this year than investors took him to be.

But Mester, who said she would have voted with the hawkish minority Wednesday, said she gained no real sense from Warsh of how the committee is approaching whether the current rate is calibrated to bring inflation back to 2%.

Asset prices, she said, blend two things at once: what investors think the data mean for the economy, and what they think policymakers will do about it. Remove any account of how the Fed is thinking, "then the market signals aren't really that instructive to you," she said. Without a framework, she added, there is no standard against which to hold the Fed accountable for its decisions.

Warsh said the Fed will be judged on whether it delivers 2% inflation. For Mester, that isn't enough.

"I actually want more from my Fed. I want to feel comfortable that the Fed knows what it is doing," she said. "I don't think it's sustainable, what he's doing, in terms of not saying anything."

Write to Nick Timiraos at Nick.Timiraos@wsj.com

(END) Dow Jones Newswires

July 29, 2026 22:54 ET (02:54 GMT)