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Federal Reserve Chairman Kevin Warsh is reportedly prepared to support a rate hike at the September meeting if inflation data, due to be released in the coming weeks, remains high.
According to a Financial Times report citing sources close to Warsh, the Fed chairman is open to tightening monetary policy if inflation comes in stronger than expected and expectations of further increases in market borrowing costs rise.
Following the news, expectations of an interest rate hike in the markets strengthened. In the futures market, the probability of the Fed raising the policy rate by 25 basis points in September is priced at around 55 percent. After the Financial Times article was published, this probability rose to 56.7 percent, while the yield on the two-year US Treasury bond increased by 4 basis points to 4.22 percent.
FED Chairman Warsh’s Communication Style Shakes the Bond Market
Despite market reaction to the Fed’s limited sharing of details regarding its interest rate strategy, Warsh appears determined to maintain his simple and concise communication style.
Investors believe Warsh has not provided sufficient guidance on how to contain the new wave of inflation caused by the Iran war and rising energy prices during the Donald Trump administration.
Following last week’s Fed meeting, US Treasury bonds saw sharp sell-offs, causing the country’s long-term borrowing costs to rise sharply. The yield on the 30-year US Treasury bond exceeded 5.2 percent, reaching its highest level since 2007.
Some investors argued that the rise in bond yields was due not only to energy prices and inflation risks, but also to Warsh’s limited communication damaging the Fed’s credibility in controlling price increases.
According to sources close to Warsh, the Fed chairman admits to making some communication mistakes during his first 10 weeks at the helm of the world’s most important central bank.
These mistakes include the Fed’s failure to sufficiently emphasize its commitment to price stability and creating uncertainty about whether its long-term plans to restructure the central bank will affect short-term interest rate decisions.
However, it was stated that Warsh and his team do not intend to back down from the restructuring process initiated because the Fed has failed to meet its 2% inflation target for more than five years.
Warsh’s approach differs from the communication policies of previous Fed chairmen, who offered comprehensive guidance to the markets. The new Fed chairman wants investors to focus on economic data rather than central bank statements, and wants less guidance on the future course of interest rates.
However, US President Donald Trump wants the institution to lower interest rates, not raise them, and according to recent reports, he has been frequently calling the Fed Chairman about this issue since Warsh took office.
*This is not investment advice.