Warsh's muddled messaging revives Fed credibility doubts

After the Fed held interest rates at 3.75%-4.00% on Wednesday, Warsh struggled to explain why it did not follow September’s rate hike with another increase. The Fed raised its assessment of the economy to “strong” from “solid” and said inflation remained “too high.” Warsh said financial conditions had tightened somewhat but that he was “unwilling and unable” to describe them as tight. He denied that the decision was influenced by next week’s midterm elections and indicated a December hike was likely.

The gap between benchmark two- and 10-year Treasury yields widened by more than 6 basis points, its biggest one-day steepening since July 29. The 10-year inflation breakeven rate rose to 2.38%, its highest since September 15. The moves indicate traders 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 messaging recalled his widely criticized July press conference, and he often chooses not to speak for the Federal Open Market Committee when explaining collective decisions. The article notes three hawkish dissents last month, the most in a decade, and says Wednesday was the first time since 2002 that a Fed governor and regional Fed president dissented on the same side.