"It seems the FOMC may be comfortable allowing the market to adjust financial conditions to balance inflation risks without an explicit contribution from the FOMC," said Elliot Clarke, head of international economics at Westpac.
"The immediate response of the market to this idea was a material steepening of the yield curve, highlighting participants' anxiety over inflation and policy uncertainty."
Thus, while 10-year yields US10YT=RR had climbed to 4.73%, yields on 2-year notes US2YT=RR held at 4.269%, markedly steepening the curve.
Fed fund futures 0#FF: now implied around a 60% chance the Fed would lift rates at its next meeting in September and had 33 basis points of tightening priced in by year-end. 0#USDIRPR
The hawkish market view contrasted with Warsh's tone.
"Chairman Warsh made several dovish comments during his press conference," said David Mericle, chief U.S. economist at Goldman Sachs. "The bond market also took today’s meeting as dovish."
Warsh appeared to downplay AI-related price pressures while hinting that the rise in market interest rates could substitute for a rate hike, though without saying so explicitly, noted Mericle.
President Donald Trump, who hand-picked Warsh, called him "brilliant" following the Fed meeting.
"I know he'd love to see lower interest rates, but he's got a board, and it's a political board, and they want to keep rates up," Trump told reporters in the Oval Office.
Trump has made no secret of his desire to see rate cuts and repeatedly put pressure on the Fed to lower borrowing costs.
"One can debate that in time, but right now it looks unhelpful and has added to the market reaction," said Gavin Friend, a senior markets strategist at NAB.
"30-year yields jumped 11 basis points to 5.2% - suggesting markets are not convinced of the Fed's conviction," he noted. "We'd add it is early days, and if Warsh is being driven in part by financial market reaction, he has a signal now."
TLT•
