Fed Should Hike Rates as Warsh Loses Bond Market Trust
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- FOMC kept the federal funds rate unchanged at its Aug. 28-29 meeting, but three of 12 voting members dissented in favor of a quarter-point increase, and eight of 19 members had projected a 2025 rate hike in June economic projections.
- Inflation has remained above the Fed's 2% target for five years, with the PCE price index 3.7% higher year-over-year and declining just 0.1% month-over-month, while the article cites Iran's continuing chokehold on the Hormuz Strait as a driver of persistently elevated energy prices.
- Kevin Warsh at his first FOMC meeting in June sounded hawkish but then spurned forward guidance, telling markets to "play the ball, not the referee" — remarks that triggered a sharp selloff in long-duration bonds most sensitive to inflation fears.
- The Wall Street Journal ran the headline "Kevin Warsh's Honeymoon With the Bond Market Is Already Over," with chief economics commentator Greg Ip countering that "the Fed isn't a neutral umpire, it's the most important player in the game."
- Warsh may need to restore credibility with investors, which the article argues is another reason the FOMC will raise rates soon — either at the September meeting ahead of midterm elections or at the final December meeting.
- Donald Trump publicly said any Fed chair he nominated would favor lower interest rates, but Warsh told senators at his April confirmation hearing that he made no promises to the president.
Why it matters: With three FOMC members already dissenting in favor of a hike and the PCE price index stuck at 3.7% year-over-year for five years above the 2% target, Warsh faces a lose-lose choice: raise rates and anger Trump before the midterms, or hold and keep losing bond market trust as long-duration yields spike on inflation anxiety.
