Warsh's Unconventional Rate Hikes: Deleveraging and Forward Guidance Gone

The Federal Reserve's latest FOMC meeting made history as three policymakers dissented in favor of a quarter-point rate hike. Fed Chair Kevin Warsh has been making changes to influence interest rates without adjusting the federal funds target rate.

Warsh removed forward-looking guidance from FOMC meeting statements, which is having an impact on the bond market. This transparency constraint used to provide a bias for easing, neutral, or tightening in the equity and bond markets.

The removal of this guidance has made the bond market more cautious when inflation is above the central bank's target of 2%. Inflation is currently at a three-year high of 4.2% in May and 3.5% in June.

Bond traders have been pushing up yields at the long end of the Treasury yield curve, increasing borrowing costs. The 30-year Treasury yield reached a 19-year high, while the 10-year yield is close to accomplishing the same feat.