Told you so. I told you he wasn’t credible, and now the market’s telling you the same thing.
The US long bond was beset in the wake of Kevin Warsh’s obfuscatory press conference, where Donald Trump’s man on the inside had no answers when pressed on why, if this Fed’s so keen to “listen” to market signals, the Committee didn’t take the opportunity to raise rates this week.
Warsh was adamant last month that markets should be allowed to “speak” and that the Fed should do more listening and less talking. Well, the market spoke: Yields rose in the inter-meeting period, reals tightened, twos were 75bps wide to EFFR at one point and STIRs came into this week still pricing roughly one-third odds that Warsh would hike.
By not hiking despite three voter dissents (albeit none from governors), Warsh made his own price stability promises sound conspicuously empty.
There’s the chart. One argument for hiking on Wednesday said pulling the trigger would give the US long-end a much needed reprieve. So much for that. 5.24% on the long bond was the highest in 19 years.
Although two-year yields ticked higher early Thursday, they were lower on Wednesday afternoon, which is to say the curve twist-steepened as traders reassessed rate-hike bets at the front-end and sold the long bond on inflation concerns.
Folks, I implore you: If you’re reading market color penned by someone who isn’t up front and explicit about their political biases (as I try to be), do yourself a favor and cast a wary eye at anything that sounds like an attempt to call this something other than it is.
With allowances for the fact that modern market structure sometimes makes it difficult to differentiate signal from noise, and with the caveat that markets are inherently fallible (representing as they do the collective “wisdom” of a mercurial species prone to fits of irrationality), we need to decide how we’re going to characterize clearing prices in the bond market.
Last month, “Mr. Market” was held up by Warsh and those celebrating his decision to give forward guidance the boot as a veritable Pythia — an almost preternatural source of invaluable information the Committee can use while attempting to divine the best course for policy. God forbid that wellspring of purity should be poisoned by forward-looking statements.
This month, some of the very same people, Warsh among them with his overly-rehearsed, David-Van-Driessen-meets-Barack-Obama inflection, were quick to deride the very same Delphic Oracle as too mercurial to trust. As evidence, they trotted out, among other things, parabolic rallies in semi stocks.
Pardon the profanity, but give me a fucking break. Suggesting, as some did Wednesday and into Thursday, that the long-end of the Treasury curve’s overreacting to Warsh’s “failure” to raise rates despite the short-end screaming at him to do so, and that the US long bond at 5.24% is akin to GameStop $483 (that’s a caricature of one such assessment, but it captures the gist of the argument), is the worst kind of politicized disingenuousness. I can cite specific examples, but I won’t out of respect for the authors.
Warsh spent the first 10 minutes of his press conference congratulating himself on the move higher in rates (nominals, reals, twos, 10s, etc.) over the inter-meeting period. When he was asked to square that enthusiasm with a policy decision that didn’t appear to accord much respect to the market’s expressed views, he had nothin.’ A whole bunch of nothin.’
Although he called “Mr. Market” “a very accomplished economist,” Warsh also alluded, more than once, to the idea that market signals are just one input. And that clearing prices aren’t, in fact, divine cues and don’t, as he and his apologists implicitly suggested in June, command any sort of automatic deference. Rather, those signals can be written off, summarily or not, as the inherently manic machinations of an addict going through withdrawals.
That latter characterization is almost too much to bear: It apologizes for the insultingly incongruous nature of conflicting messages about the reliability of market signals by — wait for it — blaming Warsh’s predecessors. If the Powell Fed hadn’t made addicts of markets, these early signals from bonds could be trusted. But for now we can write off what Bloomberg noted was among “the biggest [twist steepeners] after a Fed meeting since at least the mid-1990s” as the pitiful spasms of an addict gone cold turkey off forward guidance.
I call bullshit on that narrative, and I encourage readers to do the same. The reality’s plain as day: The bond market thinks Warsh lost some inflation-fighting credibility this week. I doubt I’m out on a limb to suggest that while Beth Hammack, Neel Kashkari and Lorie Logan were alone in dissenting, they weren’t the only participants who could’ve supported a hike.
One thing we know for sure: “Mr. Market” was more than open to the idea of raising rates this week. But what does he know, right?
I expect semis and the Mag7 will keep this party rolling for a while yet, but I sure do expect the hangover from this administration will be a doozy.
Is ivermectin also a miracle hangover cure?
Trump will listen to someone who tells him what he wants to hear. Warsh is clearly among those. Warsh can thus only listen to those who tell him what Warsh needs to tell/signal to Trump. Mr. Market and others, please take your seats, we’ll get back to you at our convenience. Let the beatings continue; morale is not yet improved.
He obfuscated because he couldn’t defend the decision. He will get better over time at not cringing over his hypocrisy, which is the hallmark of this administration. When confronted blame “insert name here”.
“Blame the predecessor” for anything not right in the world…is one of the Ten Commandments of the MAGA cult, is it not?
More like 9 of 10!
I’ve been short the long end for some time, and the stagflation trade is about to get really rich. Bonds down / gold up is not a good look. And now the “September credibility-rescue hike” puts Warsh on a collision course with Trump and the midterms.
My thesis had Project 2025 running it hot into the midterms, then allowing the collapse they’d hoped would come next year — the one that justifies the SWF. Just this morning, the deflator popped and labor firmed. What a day to be short autocracy debt.
I forgot to mention while Warsh spoke, crack spreads hit all time highs and this morning GDP decelerated. A stagflation sandwich. What drives me crazy is none of this had to happen. But apparently billionaires will not tolerate being hemmed in by the underclasses any longer.
The market will always test the new Fed chair. He will fold soon enough with this nonsense. The Powell Pivot will soon be the Warsh Whiplash.
Imagine that you covered health instead of markets, and you had to write about what Robert F. Kennedy, Jr. said. Imagine that you covered defense as closely as you do economics, and you had to write about what Pete Hegseth said. It’s a three-ring circus.
I mentioned in a previous reply after one of your missives that I was worried that warsh could lose control of the long end. I don’t think he will but what I do know is that bond traders and the market will want to know where his tolerance level for the 10yr is, testing his commitment to inflation discipline. 5.5%? 6%?
Being a brit and watching the krazy kwazi kwarteng mini budget shitshow where the Conservative government lost control of the gilts a few years ago, was a genuinely worrying episode. I don’t, for one minute, think the US will get there, but why put yourself in a stressed position when you can get the mkt onside relatively cheaply. Oh, I forgot, the ego of the chief white house nutsack
It is interesting to watch the financial media starting to catch on to Warsh = stuffed & naked Emperor Frog. He got a bit of a honeymoon by virtue of not being the other Kevin, but it will be apparent that merely not being Hassett is not enough.
This is shaping up to be a prescient call on your part, especially so, and entertaining because: the logic is so simple and plain for all to see. To the moon, dear stonks!* At least until The Hangover Part IV. Let’s hope for a late release date.
Just mildly disappointed that I can’t post the infantile meme .gifs and AI slop appropriate to the customs of us commoners here, but quickly would that hypothetical feature be withdrawn I bet.
The formatting ate the second *, I swear!
I would love to know what Jerome Powell is thinking right now. He is probably out shopping at Orvis for a new fly rod — with a knowing smile on his face — looking forward to their meeting at Jackson Hole next month.
I watched Warsh sparring with Elizabeth Warren the other day and he looked like a stooge lost in the headlights. I have very little confidence in his neutrality going forward. He will carry water for Trump until the dam breaks or Trump attempts to fire him as is his fashion.
the tasks forces are to cover for his lack of ideas and lower than we thought IQ.
The only lesson Warsh might have learned is that 5 Task Forces may be insufficient. Perhaps a sixth that studies how the Dumocrats put Mr. Market on permanent disability by slathering DEI all over it, followed by a seventh that studies how mortgage applications and imprecise construction cost estimates affect Fed leadership and independence?
Hmm..maybe cut him some slack here. If Mr. Market really wanted that rate hike, STIRs should have come into the meeting pricing two-third odds of a hike. Warsh did listen to the majority of STIRs (two-third odds said “unchanged”). Besides, managing the long-end of the curve isn’t the sole purview of the Fed. Scott Bessent should have joined the press conference with Warsh.