The message from the bond market was clear: For all of US Federal Reserve Chairman Kevin Warsh’s tough talk about taming inflation, he’s not rushing fast enough to deliver.After the Fed kept interest rates unchanged for a seventh consecutive month on Wednesday, investors dumped 30-year Treasury bonds, sending the yield shooting up as much as 14 basis points to nearly 5.23 percent, a 19-year high. Market measures of inflation expectations rose, the US dollar slid, and even stocks tumbled as investors wagered Warsh was only delaying an inevitable rate hike. The moves revealed investors are growing increasingly concerned that Warsh won’t manage to rein in inflation that has run above the Fed’s target for five straight years.
US Federal Reserve Chair Kevin Warsh speaks during a news conference at Fed’s headquarters in Washington, DC, on Wednesday.
As a result, bondholders both pushed down yields on the most short-term Treasuries — a reflection of how they rapidly scaled back bets on immediate increases — and demanded higher payouts on longer-term bonds to compensate for inflation risks in the years ahead. The drop in two-year yields coupled with the rise in 30-year rates made for one of the biggest such steepenings of the yield curve after a Fed meeting since at least the mid-1990s.That steepening indicates Warsh’s “policy strategy lacks credibility,” said Ben Emons, managing director of fixed income at Highline Asset Management LLC and founder of FedWatch Advisors LLC.
