Warsh's Inflation Strategy Crashes and Burns: Long-Term Borrowing Costs Hit 19-Year High

Federal Reserve Chairman Kevin Warsh is facing a growing credibility crisis after his inflation-fighting strategy backfired, pushing long-term borrowing costs to an 19-year high.

The turmoil began following the Federal Open Market Committee's 9-3 vote to keep interest rates steady at 3.50%-3.75%, with Warsh hinting that the Fed might change its inflation target without a concrete plan for rate hikes.

Nathan Sheets, Citigroup's global chief economist and an 18-year veteran of the Fed, described the spike in long-term bond yields as an 'absolute red flag,' warning that Warsh must make a definitive choice by the September policy meeting.

A growing faction of central bank colleagues is demanding rate hikes to combat inflation, which remains far above the 2% target. The Dallas Fed's Lorie Logan warned that without immediate policy restraint, 'inflation will likely continue to trend above target until there's an unanticipated shock.'