Warsh's Inflation Comments Spark Market Selloff, Raise Credibility Concerns

Federal Reserve Chairman Kevin Warsh has been making bold statements about fighting inflation for months, but his recent comments have left Wall Street questioning his commitment to price stability.

Warsh's post-meeting press conference following the Fed's decision not to change rates on Wednesday sparked a selloff in Treasuries, sending yields sharply higher. He vowed 'regime change' at the Fed by rolling back forward guidance and offering no clues on where rates are headed.

The market reaction was unexpected, as investors had largely bet policy would remain steady. Warsh's comments also hinted at using alternative inflation gauges and tools other than rate hikes to fight inflation, which some saw as a sign of dovishness.

JPMorgan economist Michael Feroli noted that the new chairman's comments about looking beyond the Fed's preferred inflation gauge likely didn't sit well with everyone on the FOMC. A major test for the Fed will come on Friday when the Labor Department reports monthly payroll data, which could fuel more worries about inflation.

BofA pointed to the bond yield curve as an indicator of the central bank's perceived commitment to reining in inflation. If Wall Street expects rate hikes are coming soon, short-term yields will jump. But if markets doubt the Fed, the short end will fall while the long end surges, steepening the curve.