Warsh's muddled messaging revives Fed credibility doubts
TLT•Kevin Warsh’s unclear explanation for the Federal Reserve’s decision to hold rates at 3.75%-4.00% revived investor doubts about its commitment to its 2% inflation target. The 10-year inflation breakeven rate rose to 2.38%, its highest in six weeks, while the two- to 10-year Treasury yield gap widened by more than 6 basis points.
1. Unclear rate decision
The Federal Reserve left interest rates unchanged at 3.75%-4.00% after raising them in September. Warsh said the economy was “strong” and inflation remained “too high,” but struggled to explain why policymakers did not raise rates again. He said a December hike was likely and denied that the decision was influenced by next week’s midterm elections.
2. Market signals
The two- to 10-year Treasury yield gap widened by more than 6 basis points on Wednesday, its largest one-day increase since July 29. The 10-year inflation breakeven rate climbed to 2.38%, its highest since September 15.
3. Confidence questioned
The article says investors are questioning whether the Fed under Warsh is willing to take the steps needed to rein in inflation, which has been above target for nearly six years. Warsh’s communication also left questions about whether the committee is unified; three hawkish policymakers dissented last month, the most in a decade.
