Kevin Warsh credibility is facing new scrutiny after the Federal Reserve chairman left interest rates unchanged following his second meeting leading the central bank’s rate-setting committee, according to CNBC. The Federal Open Market Committee voted 9-3 on Wednesday to hold rates steady, a decision that triggered a sharp market reaction.
Following Warsh’s press conference on Wednesday afternoon, investors sharply lowered the odds of a near-term Fed rate hike while simultaneously pushing yields on long-term government debt higher, CNBC reported. The yield on the 30-year Treasury hit its highest level since 2007, while the yield on the 2-year Treasury fell. According to CME FedWatch data cited by CNBC, the probability that the Fed would leave interest rates unchanged at its next meeting jumped by 20 percentage points to 45%.
It was only the second FOMC meeting since Warsh became chairman of the Federal Reserve on May 22, CNBC reported. Details of the committee’s decision are available through the Federal Reserve’s official press release.
The market reaction suggested investors believe the Fed will not act immediately on inflation readings that, by Warsh’s own account, have remained above the central bank’s 2% target for at least 63 months, CNBC reported. Before taking the role, Warsh had sharply criticized his predecessor, Jerome Powell, when long-term Treasury rates rose following a Fed rate cut, repeatedly attributing the issue to Powell’s lack of credibility. Wednesday’s situation differed in that the Fed held rates steady rather than cutting them, and Warsh suggested the recent rise in long-term rates may have reflected positive economic developments such as strong business investment.
Jon Hilsenrath, a longtime Federal Reserve watcher, wrote in a note to clients that Warsh needed to clearly articulate what would prompt him to eventually raise interest rates given persistent inflation. “Warsh didn’t convey the message clearly or explicitly, and the bond market puked on him,” Hilsenrath wrote, according to CNBC.
Warsh declined to answer reporters’ questions about why he and eight other FOMC members judged the current interest rate range of 3.5% to 3.75% appropriate, CNBC reported. Warsh has moved away from forward guidance, a practice under which previous Fed chairs signaled the likely future path of interest rates, saying in his opening remarks that the committee needed to “observe market reaction to developments, direct and unfiltered.”
Eric Winograd, chief U.S. economist at AllianceBernstein, described the press conference as “confusing and often internally contradictory” in a note to clients, according to CNBC. Consumer price index data had shown prices declining by 0.4% in June, but Warsh said that data point was “not much” of a consideration for him, while affirming that inflation remained “elevated.”
On the personal consumption expenditures index, the Fed’s alternative inflation measure, which stood at 4.1% in its most recent reading, Warsh did not offer clarity on his satisfaction with the data, CNBC reported. He noted that one of five task forces he has appointed to review Fed reforms could recommend downplaying the PCE index as the central bank’s official inflation target when it issues findings later this year, though he said the Fed is “sticking with PCE for now.”
Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote that Warsh’s unwillingness to specify conditions for a rate hike, combined with his ambiguity on the PCE measure, raised questions about the new chairman’s credibility in delivering lower inflation, according to CNBC. Feroli noted that three FOMC members dissented from Wednesday’s decision, adding that further dissent could emerge if economic data does not improve in coming months, and that a Fed chair has never previously been in the minority on an interest rate vote. Separately, market volatility this week has also been shaped by other policy developments, including Trump’s 12.5% tariff levy on Australia. Questions surrounding Kevin Warsh credibility are likely to persist as the Fed navigates a divided committee in the months ahead.
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