Federal Reserve Chair Kevin Warsh's closely watched remarks on curbing consumer price inflation have eased some concerns about the central bank's ability to fight inflation, while short-term Treasury yields rose as traders priced in the possibility of higher short-term rates. During Warsh's speech, short-dated Treasuries were sold off while long-dated bonds gained. The two-year yield climbed 5 basis points to 4.28%, while the 30-year yield slipped 1 basis point to 5.19% — both moves pointing to market expectations that the Fed may need to raise short-term rates. Bond traders have harbored doubts about Warsh's policy stance since his first press conference in June, when he stressed the need to bring down inflation and took a hawkish tone. With inflation running above the Fed's 2% target since the post-pandemic reopening in 2021, and the Fed holding rates steady again in July without guidance on a potential hike this year, long-end yields have risen sharply as traders demand higher compensation for inflation risk. Warsh warned Friday that inflation has not shown meaningful slowdown, saying policymakers must be convinced inflation is improving — otherwise the central bank "has more work to do." He reiterated that policymakers will bring inflation back to the 2% target, calling the goal clear and fixed.
Federal Reserve Chair Kevin Warsh's closely watched speech on Friday has shifted expectations in the Treasury market, with short-dated yields rising as traders increasingly price in the possibility of a rate increase.
During Warsh's remarks, short-term Treasuries were sold off while long-dated bonds gained. The two-year yield climbed 5 basis points to 4.28%, while the 30-year yield slipped 1 basis point to 5.19%. Both moves point the same way: the market now expects the Fed may need to raise short-term interest rates.
Doubts Persist Since June
Bond traders have been wary of Warsh's policy stance since his first press conference in June, when he stressed the need to bring down inflation and took a hawkish tone.
Inflation has stayed above the Fed's 2% target since the global economy reopened from the pandemic in 2021. The Fed held rates steady again in July, and Warsh offered no indication of whether a hike could come this year. Since then, long-end yields have climbed sharply, as traders demand higher returns to compensate for the risk of accelerating inflation.
Friday's Warning
Warsh warned on Friday that inflation has not shown a meaningful slowdown. Policymakers must be convinced that inflation is genuinely improving, he said — otherwise, the central bank "has more work to do."
He also reiterated that policymakers will bring inflation back to the 2% target, describing the goal as clear and fixed.
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