"It's hard to know what to make of Warsh's remarks, which involved a lot of well-turned phrases but little in the way of a coherent macro view," Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a note after Warsh's press conference.
Under the Fed's current rules, Warsh's colleagues, including the dissenting chiefs of the Fed's Cleveland, Dallas and Minneapolis regional banks, are free to speak their minds beginning on Friday.
While he declined to say what's next for monetary policy, Warsh said, "I want to stress, of course, that decisions by this committee matter a great deal, and where necessary and appropriate, we will not hesitate to act."
He noted that bond yields since the Fed's last monetary policy meeting had risen notably — investors have priced in interest rate increases — and he welcomed that move, even while saying it did not mean the central bank needed to ratify it with action.
"I was comforted that markets in the inter-meeting period weren't reacting to us" and that traders and investors "weren't reacting to dots or to speeches" from the Fed, but instead relied on their own judgment, Warsh said. The dots refer to the so-called "dot plot" chart of rate projections from Fed policymakers that are released on a quarterly basis.
"We don't endorse any particular market move" even as officials observe market pricing "with keen interest," Warsh added.
Since the last Fed meeting in June, the Treasury market yield curve — which plots market-based interest rates at different bond maturities — had flattened, reflecting a sharper move up in the shorter-dated yields closely tied to Fed policy expectations than in those for longer-dated bonds that are more sensitive to the inflation outlook.
On Wednesday, however, that dynamic shifted and the curve steepened sharply as yields on 2-year Treasury notes fell while those for 10-year notes and 30-year bonds moved up. The yield on the inflation-sensitive 30-year bond, in fact, crossed above the 5.20% level for the first time since mid-2007.
Financial markets, in other words, were questioning the Fed's credibility, economists at Bank of America wrote in a note titled "Doved and Confused."
"Ironically, we think the need to re-establish credibility increases the probability that the Fed will hike in September, all else equal," the Bank of America analysts wrote.
Over the next couple of months the Fed will get two new monthly readings on the job market and inflation.
"At this stage, I think we should expect the FOMC to hike rates by 25 basis points in September unless the labor market data collapses, or core inflation prints closer to 2% annualized, which I do not expect in the July or August readings before the September FOMC," said Omair Sharif, founder and president of forecasting firm Inflation Insights.
In leaving the policy rate pinned in the range it has been since December, Fed policymakers may be embracing the idea that current borrowing costs are creating enough friction in the economy to reduce any inflation that isn't, like the effect of tariffs on goods prices, expected to fade on its own.
But Warsh said little about the mix of risks and nothing about the outlook, though he has expressed the expectation that rising productivity aided by AI will allow the economy to grow faster without also pushing up inflation.
Financial markets ahead of this week's meeting had priced in about a one-in-three chance of a rate hike and, absent such a move at this week's meeting, nearly a 100% chance of an increase at the Fed's September 15-16 meeting.
After the release of the Fed's policy statement on Wednesday, traders put about a 57% chance on a rate hike in September, according to CME Group's FedWatch tool.
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