Federal Reserve Chair Kevin Warsh’s decision last week to leave interest rates unchanged was followed by a sharp selloff across the U.S. bond market, prompting one veteran bond investor to argue that the market reaction produced tighter financial conditions than a conventional 25 basis point rate hike would have. Eric Hickman, founder of Lantern Capital, said that by last Friday’s close, the combined market value decline across U.S. Treasuries, notes, and bills of different maturities had reached about $115 billion after the Fed decision and Warsh’s press conference.
Hickman estimated that if the Fed had instead raised rates by 25 basis points that week, and yields on bonds with maturities of up to five years had risen by the same amount, losses under that extreme scenario would have been about $65 billion, still below the actual drawdown. He said the Fed may have achieved stronger tightening by allowing markets to reprice rather than directly lifting the policy rate, while also avoiding a commitment to keep rates higher for longer. Treasury yields moved sharply higher, with the 30-year yield rising to 5.229%, a nearly 19-year high, and the 10-year yield reaching 4.688%, its highest level since January 2025. Still, Hickman said it remains unclear whether Warsh intentionally used market reaction as a tightening tool. St. Louis Fed President Musalem also signaled internal disagreement, saying monetary policy is the responsibility of the FOMC, not financial markets.
Federal Reserve Chair Kevin Warsh kept interest rates unchanged last week, but the decision was followed by heavy turbulence in the U.S. bond market. One veteran bond fund manager said the market response may have delivered tighter financial conditions than an actual 25 basis point rate increase.
Eric Hickman, founder of Lantern Capital, said that after the Fed’s rate decision and Warsh’s press conference, the combined market value of U.S. Treasuries, notes, and bills across different maturities had fallen by about $115 billion as of last Friday’s close.
Hickman said that if the Fed had chosen to raise rates by 25 basis points that week, and if yields on bonds with maturities of up to five years had risen by the same 25 basis points, bond market losses under that extreme scenario would have been about $65 billion. That figure was lower than the losses caused by the actual market move.
In his view, Warsh achieved stronger tightening by not directly raising the policy rate and instead letting markets reprice assets on their own. Hickman also said that approach allowed the Fed to avoid committing to keeping rates higher for a longer period.
Market data showed that the yield on the 30-year U.S. Treasury rose to 5.229% last Friday, the highest level in nearly 19 years. The 10-year Treasury yield climbed to 4.688%, its highest point since January 2025.
Hickman added that it is still not possible to determine whether Warsh deliberately relied on market reaction to tighten policy. Even so, he said Warsh has long argued for reducing forward guidance and letting markets absorb economic information on their own, and that idea was clearly reflected in this policy move.
There was also disagreement inside the Federal Reserve. St. Louis Fed President Musalem said responsibility for monetary policy belongs to the FOMC, not to financial markets, signaling concern about relying on market adjustments to produce policy effects.
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