Globally, what former Fed Chair and Nobel Economics Prize winner Ben Bernanke deemed a "global savings glut" that kept market interest rates low has evolved into a global savings squeeze with rising government debts, fractured international trade and supply lines, the costs of population aging, and booming private investment in artificial intelligence competing to divvy up the dollars available to invest and lend.
"Both the bond market and the FOMC have clearly decided to wake up" to account for higher inflation and what promises to become "a secular, multi-year uptrend in interest rates," said Adam Posen, president of the Peterson Institute for International Economics.
Given the questions Warsh left open after his post-meeting press conference last month, Posen said the Fed chief needed to dwell less on the long-term ideas he wants to pursue and more on how the central bank is evaluating the economy in the here and now along with the implications of recent global market developments.
"What he should say is 'I have watched the data, listened to the market as I said I would, listened to the committee, and clearly there is reason to consider a hike in coming months if data does not change,'" Posen said.
The recent jump in U.S. and global bond yields and Treasury Secretary Scott Bessent's decision to intervene in the market have raised the possibility that Warsh will have to account for a more activist Treasury Department and rising government debt costs — in theory not the Fed's concern unless government financing starts to stumble or Treasury's financing choices start to influence short-term interest rates.
The Fed's key policy tool is an overnight interest rate, and gaps between that and short-term government debt rates, if they emerge, could make the central bank's management of rates more difficult.
The impact on the value of the dollar, which has been falling over the last month against other major currencies, could also add to inflation.
"We are in a regime where activist Treasury policy is as material — for good and for bad — as central bank policy. The interaction of the two will be key to the outlook," Krishna Guha, a former top New York Fed official who is now vice chairman of Evercore ISI, wrote last week as he and other analysts assessed rising bond yields.
"Warsh has tried to make the unconventional case that the Fed should stand back and let the market form an unguided yield curve ... while hinting long-end tightening might be preferable to short-end tightening. It is hard to make that case when investors see Bessent as trying to manage the long end," Guha said.
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