Warsh's Silence Fuels Market Volatility as Fed Rate Hike Looms

Federal Reserve Chairman Kevin Warsh's minimalist communication style has left bond traders searching for signals, leading to higher long-term Treasury yields. The 30-year Treasury yield hit its highest level since 2007, climbing above 5.2% after the July 29 policy meeting and closing near 5.17% on Wednesday.

The market's reaction reflects concerns about inflation and rate policy, with the Fed's preferred inflation gauge, the personal consumption expenditures price index, running at 3.7% in June. Warsh has stated that he believes inflation expectations matter more than his commentary, but the market is reacting either way.

Futures trading suggests a 55% chance of a rate hike in September, and people familiar with Warsh's thinking said he would raise rates if coming inflation readings run hot. The two-year yield rose 0.04 percentage point to 4.22% on Thursday after the Financial Times report.

Warsh is expected to use his speech at Jackson Hole to explain his thinking behind this approach, and has floated cutting the number of rate-setting meetings each year. This may provide investors with less clarity, as market-making moves are compressed into fewer, bigger days.