ROI-Warsh's muddled messaging revives Fed credibility doubts: McGeever

For a spell between late August and mid-September, ​Federal Reserve Chair Kevin Warsh seemed to regain financial markets' confidence that the central bank, under his ​leadership, was fully committed to getting inflation back down to its 2% ‌target. ​After a rocky start in the job, credibility appeared restored. Not so fast.

During his press conference on Wednesday after the Fed left interest rates on hold at 3.75-4.00%, Warsh struggled to clearly explain why the central bank didn't follow its September rate hike, the first in more than three years, with another increase. After all, the Fed raised ‌its assessment of the economy to "strong" from "solid," while also admitting that inflation is still "too high." Warsh did note that financial conditions have tightened somewhat since the rate hike six weeks ago, but he also said that he was "unwilling and unable" to describe them as tight.

If the US is experiencing above-target inflation, strong growth, low unemployment, and non-restrictive financial conditions, why didn't the Fed raise rates? It was a simple enough question, put to Warsh in different ways by multiple journalists, yet ‌he didn't offer investors much to hang their hats on, except to categorically deny that the decision was influenced by next week's midterm elections and indicate that a hike in December is likely.

While Warsh insisted that ‌2% was the Fed’s only inflation target, the incoherent messaging on Wednesday was reminiscent of his widely panned press conference in July. He made more than a dozen references to policymakers and consumers "interrogating reality" and assessing the economy by "looking out the window" – whatever that means. “Mere words don’t help inflation,” said Brian Jacobsen of Annex Wealth Management. That is always true, especially when the words don’t say much at all.

CONFIDENCE GAP The bond market wasn’t impressed.

The “2s/10s” yield curve, the gap between benchmark two- and 10-year Treasury yields, widened by more than 6 basis points on Wednesday. That might ⁠not sound ​like a lot, but it is the most the curve has ⁠steepened in a single day since July 29. That was the day three policymakers seeking a rate hike dissented from the Fed’s decision to keep policy unchanged, and Warsh’s muddled communication left investors wondering whether the Fed was rethinking its inflation target.

Meanwhile, the 10-year inflation breakeven rate ⁠rose to 2.38%, the highest in six weeks. Or, more precisely, the highest since September 15, the day before the Fed's unanimous decision to raise rates for the first time since 2023. What all these moves indicate is that traders are questioning whether the Fed, ​under Warsh’s leadership, is willing to take the policy actions needed to rein in inflation, which has been above target for nearly six years.

TWO STEPS FORWARD, ONE STEP BACK It didn't have to be ⁠this way. It looked like Warsh had put the credibility genie back in the bottle with his speech at Jackson Hole on August 28, and his post-meeting press conference on September 16. In both, he assuaged investors of their previous concerns around his commitment to the Fed's 2% inflation goal.

But ⁠if ​that was two steps forward, Wednesday was one step back. Warsh's communications problem stems not only from the frequent incoherence of his messaging but also from the fact that he often chooses not to speak for the Federal Open Market Committee when explaining the committee's collective decision. This opens him up to the suggestion that the committee he's leading isn't unified.

In Warsh’s defense, that may simply reflect reality. The three hawkish dissents last month were the most ⁠in a decade, and Wednesday marked the first time since 2002 that a Fed governor and regional Fed president dissented on the same side. Indeed, this was the first hawkish dissent from both a governor and regional bank ⁠president since 1990. But the Fed is at a delicate ⁠juncture, navigating elevated energy prices, mounting AI anxieties and a questionable global growth outlook. Division, confusion, and muddled messaging aren’t a great look.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.

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