Driving the news: Fed Chair Kevin Warsh held rates steady on Wednesday. Markets expected that. What they didn't expect was the press conference.
Warsh offered no roadmap on inflation. He floated alternative price gauges. He suggested higher yields had already done the Fed's work. Treasuries sold off hard.
Bank of America's Aditya Bhave labeled it a 'central bank inflation credibility shock.' His read: Warsh's dovish signals make a September rate hike more likely, not less. The FOMC must now clean up the mess.
JPMorgan economist Michael Feroli agrees. He wrote that Warsh's comments about ditching the Fed's preferred inflation gauge 'likely didn't sit well' with other FOMC members. Those members, he added, 'will vote to take action to deliver on the institution's mandate.'
By the numbers: Watch the yield curve Friday. Strong jobs data drops from the Labor Department. If the curve flattens — short yields up, long yields down — markets still trust the Fed. If it steepens, credibility is gone.
Apollo Chief Economist Torsten Slok put it plainly: saying you have goals is not enough. You have to explain how you get there.
The bottom line: Warsh inherited a Fed that leaned too hard on forward guidance. His instinct to scrap it isn't wrong. But markets price commitments, not vibes. Right now the bond market is charging a credibility premium — and every basis point of steepening is a bill the Fed, and ultimately the taxpayer, will have to pay.