Federal Reserve Chairman Kevin Warsh wants bond investors, not the Fed, to help set the price of money in America — and Friday's July employment report is the next test of that approach. Treasury yields have already jumped since Warsh scaled back the Fed's forward guidance, and investors say they are demanding a premium for the added uncertainty.
Federal Reserve Chairman Kevin Warsh wants the bond market to take the wheel, contending it should do more of the work of setting the price of money in America. Friday's July employment report offers the next test of that approach, a key read on an economy many investors already believe is running hot.
A rate hold was expected at Warsh's press conference last week — futures markets saw only a one-in-three chance of a hike — but what rattled investors was the absence of any clear signal for what comes next. The 30-year Treasury yield jumped to its highest level since 2007, while the 10-year touched levels last seen in January 2025.
Oil prices spiked heading into the Fed meeting amid the ebb and flow of the Iran war, renewing questions about Warsh's inflation-fighting resolve. Yields and oil have since eased modestly, though how the shift plays out in markets remains unsettled.
What "less guidance" means
Forward guidance — the Fed's signaling on likely rate paths — became standard after 2008, when rates hit zero and policymakers used future promises to push down long-term borrowing costs. The tool worked as intended then, said FHN Financial chief economist Chris Low, but the habit grew under Jerome Powell, who rarely moved rates without telegraphing them first — which, Low said, can tie the Fed's hands when quicker action is warranted.
Warsh argues that the Fed is no better than markets at forecasting the future, so its decisions should look backward rather than forward — pointing to the Fed's "transitory" inflation call after the pandemic as a case in point. PGIM chief investment strategist Robert Tipp says less certainty from the Fed forces investors to price risk themselves rather than lean on Fed promises, pointing to the prior hiking cycle, when Powell talked down the rate outlook even while raising rates.
A premium for uncertainty
DRW Trading market strategist Lou Brien argues markets aren't refusing the job Warsh has handed them — they're pricing what it costs to do it without a map. Part of that premium, he said, also reflects lingering questions about Warsh's independence from the White House.
Even so, Brien argues the Fed's influence doesn't vanish just because it stops explaining itself: investors still parse Fed statements, dissents and press-conference answers for clues to its reaction function. He summed up that wariness bluntly: "The Fed casts a shadow, like it or not," Brien said.
The approach is a harder sell with inflation elevated, though. Inflation was under 3% and falling when Warsh first made the case for stepping back; it's closer to 4% now, which FHN's Chris Low says is fueling much of the criticism aimed at Warsh's approach.
Sources: Economy News, Reuters
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