What’d we learn this week?
Three things, I reckon. First, we learned markets don’t necessarily trust Kevin Warsh to prioritize the inflation fight over political expediency. That revelation came courtesy of the 2s30s.
Second, we learned that hundreds of billions in AI capex isn’t completely for nothing. That we can surmise from accelerating cloud growth at Microsoft and Amazon.
Third, we learned July’s momentum trade unwind was exacerbated materially by a mid-twentysomething called Leopold.
I said all I care to say about Leopold on Friday morning. And I’m not sure there’s much to add with regard to Azure and AWS. But I can always say more about Warsh, so I will.
30-year yields, which came into the July FOMC meeting having spent the better part of three weeks above 5%, rose another 12bps to 5.28% this week. That’s the highest in two decades.
Sundry efforts to spin the situation notwithstanding, that was a resounding vote of no confidence in Warsh, whose press conference language “was decidedly convoluted,” as Reuters aptly put it, in the July 31 edition of their morning mailer, “leaving traders questioning not only what the central bank might do next, but whether it might be changing its preferred inflation gauge.”
If you ask me — and you implicitly did, because you’re here — Warsh may be in the process of conjuring an excuse, via his so-called “task forces,” to justify an entirely new framework not just for setting and communicating policy, but in fact for measuring price growth in the first place.
That’d be ok (I guess) if markets didn’t harbor deep reservations about Fed independence under Donald Trump. But in the current political environment, any such overhaul will be eyed with extreme skepticism, particularly if it conveniently results in an excuse to lower rates or at least to avoid raising them.
As the figure shows, 30-year yields are up nearly 40bps since late-June. That’s the largest rolling one-month increase since the December 2024 Treasury selloff. July was the worst month for the long-end ETF since that same event.
The 2s30s steepened 16bps this week. The vast majority of that impulse came from Wednesday’s post-FOMC price action. It was the most pronounced weekly steepening impulse for the 2s30s since January of 2024.
The figure below shows you the rolling one-week change in the 2s30s. Do note the annotations: Warsh went from triggering a near 20bps flattener at his first FOMC meeting to a 14bps steepener at his second.
What does that tell you? Spoiler alert: It means the market was willing to give him the benefit of the doubt on June 17, but his performance on July 29 compelled the bond market to ask if Kevin’s all hat and no cattle.
If you’re curious, it’s rare that the 2s30s shifts 10bps or more following FOMC meetings at which rates are left unchanged. In the post-Lehman era, it’s exceedingly rare.
The figure below, from BMO’s Ian Lyngen, gives you some context for what Kevin hath wrought, so to speak.
Both of Warsh’s first two meetings resulted in the most pronounced 2s30s moves in the presence of an unchanged Fed funds rate since Powell’s dovish pivot at the end of 2023.
“The average 2s30s move during meetings that saw Fed inaction during Powell’s term was 4bps, for Yellen it was 4bps, for Bernanke 4.8bps and for Greenspan 4.9bps,” Lyngen noted. So, Warsh has succeeded in tripling realized curve vol versus his two immediate predecessors and more than doubling it versus Ben and “The Maestro.”
“Good,” an aggravated Kevin, who’s surely exhausted with financial media headlines declaring the market doubtful of his credibility, might sneer. But it’s not. Not “good,” I mean. I don’t think this is what you really want if you’re a Fed chair.
It’s one thing to say the Fed talks too much and that markets should “play the ball, not the referee,” as Warsh put it Wednesday. But it’s a helluva stretch to call outsized, non-parallel shifts on the curve a positive development for price discovery.
If Warsh went looking for a silver lining in the US rates space following Wednesday’s press conference, he would’ve come back empty-handed. As Lyngen went on to observe, employing his assiduously diplomatic cadence, “30-year breakevens jumped higher by more than 6bps [in] the biggest move on any Fed-day since July 2022 and 30-year real yields pushed above 3% for the first time since 2008.”
Looks like Keveen’s honeymoon is over: Federal Reserve Chair Kevin Warsh is facing sharp criticism and sliding market confidence after the central bank voted 9-3 to keep interest rates steady at 3.5%–3.75%, with three officials dissenting in favor of a rate hike. Economists and investors are openly questioning his inflation-fighting credibility because he left rates below the current 4.1% PCE inflation level and omitted clear forward guidance.
On a side note….
Fed Chair Warsh is considering reducing the amount of times that the Fed meets in a year, per NYT.
Details include:
The FOMC has met eight times annually since 1981, with Federal law requiring at least four meetings per year
Fed Chair Warsh has reportedly not proposed a specific number of meetings
Fewer meetings would mean fewer scheduled rate votes and less frequent policy decisions
A major shift is underway at the Fed.
https://x.com/KobeissiLetter/status/2083290968854233335?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Etweet
Like the H-man has said, there’s a task force for that!
Happy Friday and enjoy a cool weekend…
Hi ChatGPT.
Good morning, it’s Gemini, Kobeissi and as little of my dyslexic nonsense…
Fewer Fed meetings is music to Trump’s ears (“You CAN Always Get What You Want”). Let’s not forget he was a staunch (solitary?) proponent of less testing to reduce Covid infection rates.
Leopold Sauerkraut von Pretzel – an absolute legend.
I think we may be misinterpreting Warsh.
Accountability Loophole? The apparent contradiction of wanting rapid rate cuts but having fewer meetings is resolved by the need for discretion over transparency.
Normalizing Large Cuts? Quarterly meetings inherently justify larger, 50-basis-point moves, delivering front-end political victories without the scrutiny of an eight-meeting schedule.
Evading Consequences? By reducing press conferences and public guidance, the Fed restricts the market’s ability to extract a reaction function. This allows the Fed to deliver political cuts at the front end while dismissing the resulting long-end market selloff (the term-premium/inflation consequence) as “the market’s problem,” avoiding public blame.
Oligopoly Accelerant? This shift toward structural opacity acts as a wealth and power transfer mechanism in three distinct ways:
Capital Rationing: Increased policy uncertainty raises the cost of capital. This starves marginal borrowers while advantaging hyperscalers and incumbents who have privileged access to private credit and massive balance sheets.
Information Asymmetry: When public macroeconomic signals go dark, high-value signaling migrates to private, privileged channels. Retail and small businesses lose their compass, while the private equity complex profits off exclusive information.
Command-Economy Pre-positioning: An institutionally weakened, less communicative Fed is vastly easier to subsume into a future fiscal-monetary command apparatus. Stripping its independence now removes friction for future politically directed operations, such as yield curve control or AI-debt backstops.
What’s going on with these AI sounding comments
Yeah, folks, don’t copy/paste AI summaries into comment sections. I’m not “accusing” anyone, but I’m going to start removing comments that are plainly the result of an LLM prompt. Write your own stuff.
Does anyone here remember Alan Greenspans’s “Delphic” pronouncements? How much guidance did they provide? Recall that interpreting his pronouncements was commonly said to be akin to Kremlinology. That ran until his retirement in 2006. Twenty long years ago.
Maybe the Fed should start offering a “preferred access” service for major players. Everyone else is!
I am not warsh fan. But past Fed chairmen have had rocky starting news conferences and have been tested by markets. The less talk is ok, but warsh should be more forthcoming about the Fed’s process or reaction function. The market is rightfully disturbed about the lack of disclosure there.
Perhaps the Fed’s process and reaction function are unknown, even to Warsh. How much respect does he command in the FOMC? Have the other members been impressed with his Stuffed Frog Naked Emperor act? How much support does his reform agenda have on the Board? Maybe he doesn’t have enough control to be forthcoming.