Investors heartened by Warsh inflation talk, still uncertain about Fed action

Investors were heartened on Friday ⁠by ⁠new Federal Reserve Chair Kevin Warsh’s stated resolve to tame ⁠high inflation, but many on Wall Street remained unclear about how the U.S. central bank will react to economic changes in the months ​ahead.

In a highly anticipated speech, Warsh said the central bank will “have work to do” if policymakers are not confident that underlying inflation is returning to its 2% target. He also indicated financial conditions do not appear ‌restrictive and came closer than previously to acknowledging that ‌interest rate hikes may be needed to ease price pressures.

Since starting as chair several months ago, Warsh has made clear he plans to pare back the Fed’s communications, including no longer indicating the central ⁠bank’s interest rate path ⁠through forward guidance, a position he re-emphasized on Friday. 

But investors were hopeful that Warsh’s address at the Jackson Hole, ​Wyoming, symposium would convey enough to shore up confidence in his leadership and the Fed’s commitment to controlling inflation. Investors say Warsh had sown market confusion and stoked doubts about his credibility on inflation in part by hinting at last month’s policy meeting that rising yields, by tightening monetary conditions, could reduce pressure on the Fed to hike rates.

“Warsh was certainly clearer than he was in July,” said Phil Blancato, chief market strategist at Osaic. “We ​now have a better understanding of where he wants inflation to go, but relatively little guidance on what combination of inflation and labor market data would cause the Fed to ⁠act.”

Markets suggested a hawkish ⁠take on Warsh’s speech. The U.S. Treasury ​2-year yield, which typically moves in step with Fed interest rate expectations, rose to 4.34%, its highest level in a month.

The 30-year U.S. Treasury yield was little ​changed at 5.19%. That long-term yield has recently risen to ⁠its highest level in nearly 20 years, causing investor unease ahead of the remarks.

Warsh’s speech “should quell some of the bond market anxiety as he gave a clear picture of the Fed’s stance on inflation and the need to push it down to target at sufficient speed,” said Cyrus Amini, chief investment officer at Hyphen Wealth Management.

The benchmark S&P 500 stock index was last down 0.3% on the day, while the U.S. dollar added to gains against a basket of currencies.