The Fed’s Dangerous Silence: Why Warsh Is Ignoring the Bond Market’s Scream
(SeaPRwire) – By: Raymond Vance
Treasury yields are marching upward. The 30-year Treasuries sit near 5.3%. The 20-year is around the same mark. We have not seen these heights since 2007. Analysts suggest the bond market is testing Kevin Warsh. Those close to him say he will note the teething problems. But a reaction should not be expected. Yields have climbed higher. Softer inflation and labor data have dampened the picture for Fed rate hikes. The market has already priced in these hikes. Yields have been elevated since Warsh’s latest press conference. The market got an impression in July. They thought they were doing the legwork for the Fed. They were tightening financial conditions with higher yields. Warsh declined to provide forward guidance. This is his policy. He left analysts questioning the central bank’s next move. He wants to change the communication strategy. People in the press do not like this change. They are used to the old way. They are frustrated. Warsh does not care about their frustration. He wants to focus on the bigger picture.
Warsh’s defenders point to his clarity. He intends to bring inflation to heel at 2%. At his first post-FOMC conference, he made a bold statement. He said inflation is a choice. He announced the Committee would deliver on that. He said the decision was unambiguous and unanimous. This declaration was notable. President Trump had insisted his nominee would cut the base rate. Warsh is ignoring that pressure. But the market sees a different reality. Bassam Nawfal is the chief asset allocation strategist at Alpine Macro. He suggests the Fed’s credibility is being tested. He points to the rise in the term premium. He notes the bear steepening of the curve. This followed Warsh’s first two FOMC meetings. The market is tightening conditions. The Fed is watching. The Fed is not intervening. This creates a split. The official stance is hard. The market reality is shifting. The market is doing the work. The Fed is taking the credit. Or the blame.
Randall Kroszner provides the insider perspective. He is a professor at the University of Chicago Booth School. He worked closely with Warsh in the past. They were confirmed in the same year. They sat at the same hearing. They sat side by side during FOMC meetings. Kroszner left the central bank in 2009. They worked on the response to the 2008 financial crisis. Kroszner chaired the Committee on Supervision. He worked with private sector stakeholders. Warsh worked with Wall Street. He was a former Morgan Stanley executive. Now Wall Street wonders why he is unhelpful. Kroszner says you do not want to be a slave to the market. You want to be aware. But you do not want to be ruled by it. Warsh is asking very important questions. He has formed task forces. He wants outsiders to have input. He wants family fights at the table. Critics are not impressed. Claudia Sahm is a Federal Reserve alum. She suggests Warsh is long on symptoms. He is short on solutions. Jeremy Siegel is a professor at Wharton. He says central bankers have an obligation to explain their framework. He says Warsh has fallen short.
This divergence creates a risky environment. The Fed is relying on market discipline. They are letting yields rise to cool the economy. But they refuse to provide a roadmap. This lack of transparency is dangerous. It increases the term premium. It makes borrowing more expensive for everyone. The government pays more to service its debt. Corporations pay more to invest. Homebuyers pay more for mortgages. If this persists, the economic slowdown will be severe. The Fed is betting on a soft landing. They are flying blind without forward guidance. They are ignoring the warnings from the bond market. This is a mistake. Long-term government credit ratings will suffer. The cost of this silence will be high. The bond market will eventually force the Fed’s hand. It will not be pretty.
Author bio: Raymond Vance, a senior macro-economist and consultant to central banking policy research working groups.