Bank of America Warns Warsh's Credibility is Fading Fast

Bank of America has expressed concerns over the credibility of Federal Reserve Chairman Kevin Warsh, who has been in office for only a few months. The bank's analysis suggests that Warsh appears too relaxed about inflation, causing investors to become nervous and leading to increased uncertainty in the market. This is evident from the recent decision by the Fed to maintain its policy rate unchanged, which was seen as dovish and added to the overall uncertainty.

The markets have responded accordingly, with a 'bear steepening' of the curve, higher inflation breakevens, and increased risk premia. Bank of America's analysis notes that this is typical behavior associated with credibility shocks faced by emerging market central banks. Some experts, such as Employ America executive director Skanda Amarnath, are predicting three interest rate hikes for the rest of the year.

Other economists, including Tim Duy from SGH Macro Advisors and Justin Wolfers, a professor of economics and public policy, have also questioned Warsh's leadership style. Wolfers notes that when the Fed's message becomes unclear, markets fill the gap with uncertainty. This lack of clarity has been seen in Warsh's decision to seemingly backtrack on previous rate hike predictions.