Bond Market Rejects Fed Chair Warsh's Inflation Strategy
The bond market isn't buying what Fed Chair Warsh is selling
Investors are losing faith in Federal Reserve Chair Kevin Warsh as long-dated U.S. bond prices plummet and the 30-year Treasury yield hits a two-decade high. His muddled messaging about the 2% inflation target and reliance on market-driven tightening has sparked fears that inflation expectations could become unanchored. With the likelihood of a September rate hike dropping, the bond market signals that his honeymoon period is over and his credibility is under serious scrutiny.
Warsh's honeymoon period has ended with a bang.
- Barbing
Not Hacker-y enough I think; dropped to third page from first. Now rank 79, +108 points, 42 comments, +3hr
Thanks for the link, hope they figure it out.
- miohtama
Reuters attributes this to be somehow a personal flaw in Walsh.
Pretty sure Jerome Powell, the previous chair, would have done exactly the same thing. In fact Jerome Powell is still in the Fed and participated in this decision.
- seanhunter
Speaking as a non-American, and without the lens of partisan politics, it seems incredibly obvious to me that
Kevin Warsh < Jerome Powell < Janet Yellen
... in terms of credibility as an economist, with Ben Bernanke one step to either side of Powell depending on how much you feel he was a victim of circumstances in the 2008 crisis.
That said, the current problems in the US economy are entirely out of the control of the Fed and all to do with the current administration's policies (mainly the war vs Iran driving commod vol and the on-again off-again trade tariff shuffle driving fx vol) and the long-term deficit position driving rate curve shenanigans. The AI and private credit bubbles are just adding to the anxiety. All of this ultimately feeds into domestic inflation and job market malaise.
The bond market generally doesn't take shit from anyone and it's not surprising to me that bond investors are not impressed. None of that is on Warsh.
- jmyeet
As everyone should know by now, the US government runs a massive deficit, that is the difference between tax receipts (and other income) minus expenses. The current US public debt is hovering around $40T and the annual deficit is pushing toards $2T.
A lot of that $40T was borrowed at lower interest rates but let's assume for argument's sake that it was borrowed at 5%. That's $2T in interest alone every year. There's a huge difference between adding $2T in debt at 5%+ every year vs 1-3%.
The Fed has auctions to sell its debt. That market clears at a certain interest rate so if the market isn't buying the debt the rate the Fed pays has to go up. That's what's happening here.
What's driving this is that inflation is above the ~2% target. Well above, actually. There are generally two ways of tackling high inflation: with monetary policy (ie raising interest rates) and with fiscal policy (by raising taxes). Modern US administrations (both parties) have completely abandoned any pretense of ever raising taxes. That was the appropriate solution during the inflation shock of 2020-2022. Some European countries did this with a corporate windfall profits tax (eg Spain). The US did not.
The problem is that since housing is such a huge part of consumer spending, higher interest rates mean higher mortgage rates, which means higher housing expenditure, which means higher inflation. Now luckily most mortgages in the US are 30 year fixed so this is slow to respond and only really affects new m […]