Fed Chair Faces Credibility Shock as Market Reacts to Split Decision

Bank of America is warning that Federal Reserve Chair Kevin Warsh faces an emerging-market-style 'credibility shock' following the FOMC's latest split decision. The committee voted 9-3 to hold policy steady, keeping the fed funds upper bound at 3.75%, where it has remained for nearly eight months.

The three dissents rattled traders and sent market data supporting the framing of a 'credibility shock'. The 10-year Treasury yield reached 4.75% on July 31, its highest level in 12 months, before easing to 4.70% this week. The spread between 10- and two-year yields widened from a June low of 0.27 percentage points to 0.47 points.

Warsh is also considering lowering the number of scheduled FOMC meetings from eight per year, a shift that could amplify volatility between decisions. Investors would have fewer opportunities to hear policymakers explain how incoming inflation, employment and growth data are changing their outlook.