Morning Bid Europe-Bond markets doing the Fed's work

Bond investors on Thursday shifted the prevailing dynamic as the Treasury curve steepened. The yield on the inflation-sensitive 30-year U.S. bonds US30YT=RR rose to 19-year highs. US/

A divided Federal Reserve and a confusing message from Chair Kevin Warsh on where rates are headed has left the bond market scratching its head and somehow in charge, in an odd reversal that raises questions about the central bank's credibility.

The U.S. central bank stood pat, as expected, but three dissenters underscored the growing divide among policymakers on the next steps in combating inflation that remains above the Fed's target of 2%.

Warsh vowed to contain inflation but gave no indication of the steps the central bank might take, noting that bond yields had risen notably since the Fed's last policy meeting, reflecting market expectations of higher interest rates.

He welcomed the rise in short-term bond yields, while stressing that it did not oblige the Fed to validate those expectations with policy action.

All that talk with no action is not a good look for a central bank that is aiming to convince that its independence is not under threat.

"Talking hawkish but not acting so reduces the Fed's credibility," said Wall Street veteran Ed Yardeni. "We conclude that the Fed has to raise short-term rates to lower long-term rates."

Meanwhile, fears around the AI trade kept sentiment fragile, although the selloff on Thursday was not as steep as earlier this week. Earnings from Samsung and Microsoft helped soothe nerves but a huge drop in Meta's cash flows underscored the challenge facing these firms to deliver returns on massive spending.