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Warsh says markets should tighten conditions as Fed holds rates
After the Federal Reserve’s decision not to raise rates, the yield on the 30-year US Treasury spiked to the highest level in 19 years as bond prices fell and equities tumbled.
Kevin Warsh, a new nominee for Federal Reserve chair, said he would rather rely on financial markets to tighten conditions if inflation worsens, rather than using the Fed directly. In a press conference after the Federal Open Market Committee split decision to keep rates unchanged despite inflation running at double the Fed’s 2% goal, Warsh pointed to rising long term bond yields as providing “some comfort.”
Warsh argued that markets had already done much of the adjustment since the previous policy meeting, adding that even while the Fed had not done much in 42 days, “the markets have done quite a bit.” He characterized the economic backdrop using descriptions including solid output, strong business investment and productivity, and solid labor markets, without directly addressing the inflation concern.
According to the Guardian Economics, the market reaction was negative despite Warsh’s framing. US government bonds sank, long term interest rates that influence borrowing costs rose sharply, and the 30-year Treasury yield spiked to its highest level in 19 years.
The article also notes that stock markets tumbled and that some financiers worried about potential political motivations, given Donald Trump’s demand that the Fed cut interest rates rather than raise them. The outlet says Warsh’s upbeat outlook did little to ease concerns as inflation remained a central focus for investors.