Warsh's Fed: Hesitation on Inflation Fuels Market Fears

Kevin Warsh's second meeting as Fed Chair has left investors wondering if he will be more hawkish than expected. The U.S. Dollar Index declined and the yield curve steepened after his meeting in July, with the 30-year Treasury yield reaching a 30-year high.

This reaction reflects growing concerns that Warsh may not prioritize controlling inflation as much as he did during Act One of his tenure at the FOMC meeting in June. Warsh has acknowledged the public's frustration with slow action on inflation, which has been above target for over five years.

Warsh has formed monetary policy task forces to gather information and make recommendations, but investors are skeptical that this will lead to decisive action. The Communications task force, for example, seems to favor less precise and disciplined communication from the Fed, potentially giving markets less insight into the Fed's reaction function.

Meanwhile, Warsh has expressed a preference for median inflation measures or real-time indices like Truflation, which recorded 1.75% in July compared to a June CPI inflation rate of 3.5%. However, these measures have their own limitations and may be vulnerable to methodological changes or selective interpretation.

The task forces' findings are not due until the end of the year, but investors are already concerned about the potential implications for long-term U.S. Treasuries at a time when the US public debt to GDP ratio remains near an all-time high.