Warsh's Second Act: Markets Dovish on New Fed Chair

New Federal Reserve Chair Kevin Warsh's second press conference has left financial markets reading him as dovish, despite his commitment to bringing inflation back down to 2%. Market expectations of a near-term rate hike have fallen, long-term bond yields have risen, the U.S. dollar has weakened, and stocks have declined.

Warsh did not lead the Federal Open Market Committee (FOMC) to hike interest rates in July, which was not a big surprise given most analysts assigned less than even odds to a rate hike. When reporters pressed him on why he didn't raise rates despite inflation being above target for five years, Warsh pointed to the marked rise in market bond yields since June, saying it has resulted in a tightening of financial conditions.

However, his argument was not fully convincing, and some analysts interpreted his response as taking credit for the rise in market yields by removing forward guidance. This would mean that the Fed's policy changes have led to investors pricing more appropriately the macro environment, resulting in a tightening of financial conditions.