Warsh Finds New Ways to Raise Interest Rates Without Hikes

The Federal Reserve has been watching interest rates closely in recent times, and it's not just about traditional rate hikes. According to Fed Chair Kevin Warsh, there are two non-traditional methods that can influence interest rates: removing forward-looking guidance from FOMC meeting statements and deleveraging the central bank's balance sheet.

Warsh has already made moves by axing forward-looking guidance in his first FOMC meeting as Fed chair in June. This removal of transparency is likely to make bond traders more cautious when inflation is high, which can lead to higher yields at the long end of the Treasury yield curve. As a result, borrowing costs increase, providing a similar effect to a traditional rate hike.

Another way Warsh and his colleagues can boost interest rates is through deleveraging the Fed's balance sheet, which grew tenfold between August 2008 and March 2022 to nearly $9 trillion. The new Fed chair wants the central bank to be a passive market participant, meaning they would par down this asset portfolio.

However, selling trillions of dollars in U.S. Treasury bonds could quickly move bond yields up, making lending costlier. But if Warsh is successful in garnering support for this deleveraging, the FOMC can boost bond yields without a traditional rate hike.