Kevin Warsh, in his second press conference as Fed chairman, gave the bond market credit for doing his tightening for him. Within the hour, it went further, and made clear what it thought of his decision not to raise rates.
The 30-year Treasury yield surged 10 basis points to 5.21%, its highest level in 19 years, while the 10-year—important for the mortgage market—climbed seven basis points, to 4.67%. However, the two-year actually fell four basis points.
The reason? Traders were gauging the odds of an imminent hike, and simultaneously demanded more compensation to hold longer government debt, believing that inflation would continue to bite.
Equities also took the press conference badly. After a brief surge following the initial announcement, the Dow Jones industrial average fell 1,153 points, or about 2.1%, its worst day since April 2025. The S&P 500 fell 1.5% and the Nasdaq 1.7%.
Warsh had previously spent the hour telling reporters that his system of non–forward guidance was working, partially because markets could do the job for him.
“We’ve seen a material tightening, not just in nominal rates, but in real rates too, and we’re observing it,” he said. “Even while at some level we haven’t done much in 42 days, the markets have done quite a bit.”
That is by design. Warsh’s signature move as chairman has been to strip out forward guidance so that markets can price the economy as opposed to just parroting the Fed. “What I’ve really been trying to do,” he told a reporter during the conference, “is getting an unfiltered message from markets … and then trying to judge for ourselves, ‘What does that mean about our remit?’”
‘What are you waiting for?’
Inflation has now run above the Fed’s 2% target for what Warsh himself counts as 63 months. He has held rates at both meetings he has chaired, though he has placed fighting inflation as his main priority, and the measure by which his success as chairman should be held.
Bloomberg’s Michael McKee asked Warsh directly during the press conference: “What are you waiting for?”
Warsh replied: “The decision we made today, the discussion we had in that room, was the farthest thing from inertia I can imagine.” He said he had asked for “a good family fight” among the committee and got one, noting he would “not be constrained” by how traders price hikes in September.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, wrote in a note that the hike hasn’t been canceled, just postponed. “It’s likely that market pricing for a hike has simply been pushed forward. September remains a live meeting, and the incoming inflation data between now and then will be all that matters.”
The productivity problem
The other pillar of Warsh’s patience is a claim in the FOMC statement that, as he restated: “The economy output is solid. Capex and productivity are strong.”
Productivity has grown at a 0.3% annualized rate in the first quarter and is tracking near 1% in the second, a number that many economists agree is solid-to-weak. Skanda Amarnath of Employ America called it worse than an error. “It’s a bad sign for the FOMC that they are veering into factual inaccuracies in their official statement, and in ways that smell of potential politicking from the new Fed Chair,” he wrote on X. “It would be concerning if factual misrepresentations are getting elevated due to political convenience.”
Warsh’s case for beating inflation without a recession—and potentially, without hikes—runs through AI-driven productivity gains, an argument he made in a Wall Street Journal op-ed last November. Yet Barclays economists find no statistically significant link between industry-level AI adoption and productivity growth, while a Federal Reserve Board discussion paper this month found micro-level gains that are “not adding up in aggregate.”
Warsh conceded the difficulty himself, telling the Journal’s Nick Timiraos the Fed is “inferring aggregate supply” and that “the surge in business capex in around AI, it’s making that calculation a little harder to judge.”
