Warsh's Silence Sparks Rate Hike Speculation as Fed Faces Hawkish Mood

Kevin Warsh, the new Federal Reserve Board chair, wants investors to base their decisions on assessments of the economy, not on what they expect the Fed to do. The bond market has been pushing interest rates higher in recent weeks, and though the Federal Reserve Board's Federal Open Market Committee kept the benchmark federal funds rate unchanged at its Aug. 28-29 meeting, it could follow suit by year's end.

The policy statement the FOMC released after that meeting left markets and commentators wondering what the committee is waiting for. It said 'economic activity is expanding at a solid pace,' but also noted that inflation remains elevated related to its 2 percent goal. This has been a recipe for a rate increase, as three of the 12 voting members of the committee wanted to act now.

The hawkish mood of the committee is understandable given the latest personal consumption expenditures price index, which declined only 0.1% from the previous month but was still 3.7% higher than a year earlier. Inflation has been well above the Fed's target for five years, and there's little reason to think it will subside anytime soon.

Fed Chair Warsh may be losing credibility as investors react sharply to his recent remarks that market participants are learning to play the ball, not the referee. He said this at a press conference where he rejected giving 'forward guidance' about the direction of rates but vowed that the Fed would bring inflation down.