Warsh's Hawkish Signals and Market Volatility

Federal Reserve Board Chair Kevin Warsh has been sending mixed signals about interest rates, causing markets to react unpredictably. At his first FOMC meeting in June, he sounded hawkish, but also rejected giving 'forward guidance' on rate direction. He vowed to bring down inflation instead.

Investors initially interpreted this as a sign that the Fed would raise rates soon, pushing up market interest rates accordingly. However, Warsh later clarified that market participants were reacting to news about economic growth and inflation rather than anticipating future Fed moves.

This clarification was met with sharp increases in interest rates on long bonds, indicating fear that the Fed might let inflation get out of control. Wall Street Journal commentator Greg Ip countered by saying 'The Fed isn't a neutral umpire, it's the most important player in the game.'

Warsh's defenders argue that he's simply making markets do their job: base investment decisions on assessments of the economy, not the Fed's intentions. However, this approach can lead to volatility and incorrect predictions.

The article concludes that Warsh is losing credibility, which could be a warning sign for future rate hikes. The FOMC may raise rates soon, possibly in September or December, depending on inflation trends.