Warsh's Rate Hike Dilemma: A Vote for Caution

This week's vote from the Federal Reserve FOMC committee has significant implications for the future. The decision to hold Fed funds rates at a 9-3 vote, with three dissenters wanting higher rates, caught many by surprise.

The markets did not react well to the news, with long rates, as characterized by the 30-year bond, going up and short rates dropping in what is called a bear steepener. The stock market fluctuated significantly at first but then settled down.

However, looking at the bond futures market, there was no expectation of a rate hike before the vote. But the reaction suggests that significant players were expecting or wanting a rate hike to see a Fed serious about inflation.