One of the things that Warsh said at the press conference was that the markets should be playing the ball – the yields, inflation, stocks, employment – not the referee (the Fed). He said the Fed was not going to spoon feed the market. He also said that in crisis mode, providing guidance -spoon feeding – is prudent, but in benign moments it is not.
Chair Warsh appears to be taking a more hands-off approach. You could argue that he believes the market is better at pricing financial conditions than the Fed itself. In a sense, he is checking the Fed’s ego at the door.
His message seems to be that the federal funds rate is not the only policy tool that matters. Instead, the entire yield curve provides a more complete picture of financial conditions. If markets determine that growth is too strong, employment remains too resilient, or inflation pressures are building, longer-term yields will move higher on their own, tightening financial conditions without the Fed having to lead the way.
That appears to be what we’re seeing today. Treasury yields are rising, the yield curve is steepening, and stocks are under pressure. From his office, Warsh may simply be saying, “The market is doing the work. It sees stronger growth, a firm labor market, and inflation risks, and it is repricing accordingly.”
If those conditions persist, the Fed may eventually need to raise the federal funds rate. But under this framework, the market leads and the Fed follows. Rather than trying to dictate financial conditions, the Fed validates what the market has already priced in.
Stocks are now lower
- Dow industrial average -1130 points or -2.15%.
- S&P index -95.84 points or -1.29%
- Nasdaq -331 points or -1.34%
In the debt market:
- 2 year yield -4.3 basis points at 4.233%
- 5 year yield l+2.1 basis points at 4.383%
- 10 year yield +6.3 basis points at 4.667%
- 30 year yield +9.9 basis points at 5.194%
This article was written by Greg Michalowski at investinglive.com.