The UST10 yield kissed 5.017% today, which invited significant buying, backing that yield to 4.95% for a quick trade profit, resulting in a ratcheting up to 5.001% then a close at 4.988%.
IMO, the bond market is signaling two things:
1) an acceptance of the Bessent audacious challenge that, "I am the house" with conviction.
2) an unequivocal rejection of the Trump inflationary economic policies, the toxin of which has now infested globally.
Maybe I'm ignorant, but I fail to see any link between not lowering the funds rate to Trump's threat to cut off trade with “some countries."
I can't wait to see his infuriated reaction to a 25 bps rate hike. It's great to see Trump angry. It would be just as great if voters get just as angry to ensure a blue tsunami at midterms.
The Committee will make the decision they deem best. I wouldn’t read much into the fact that a hold would be a shock to the futures markets. Those market prices have moved a lot in the last week with the inflation data which frankly wasn’t very hawkish or dovish IMO. We came into the quiet period with the members speaking and the market interpreting their comments as basically 50-50 so the whole market reaction is traders anticipating reaction functions from voters who are in the quiet period.
Warsh has spoken about wanting to break the “hall of mirrors” where the committee uses market prices to infer beliefs and optimal policy, but the market prices reflect endogenous beliefs about the committee’s choices. A hold would break this cycle. Before the last FOMC, I wrote about the FOMC communication policy and how a change from past market guiding practices could increase the term premium (see my substack)
That said, I do think a hike is in order, but it won’t be as contractionary as one might think. The long end of the curve has tightened considerably. There are real drivers, but I think we also have some Lorenzoni & Werning (2019) style slow runs on the high debt countries. In these types of cycles, a credible central bank matters a lot. I wouldn’t be at all surprised to see a hike in the policy rate combined with a well worded statement and PC arrest the rise in long-term yields and flatten the curve. This would be a wash in terms of tightening financial conditions.
I think you are completely correct to note the SEP and the Chairs PC will matter a lot. Here, ironically Trump’s lobbying and threats may help him achieve his goals in a way he doesn’t realize. If the committee votes to raise and the Chair gets questions about independence it’s a perfect opportunity to reiterate that the FOMC is independent. A claim that will be more credible after a rate increase in the wake of Trump’s lobbying. If the market believes the Fed is credibly committed to the nominal anchor and will ignore politics the Fed ironically may not have to raise rates as much as they would in the absence of this market trust.
Finally, a word about inflation. Even though the probability of a rate hike in September has shot up in the past week, the market’s beliefs about inflation are well anchored. You can see this in the futures prices for the policy path that increased only slightly for June27 onward. In other words, the total amount of rate increases didn’t change much, just the timing of them. Also, the spread around the path implied by SOFR options has decreased since the inflation reports. Investors are more confident in their beliefs about the policy path!
I hope Warsh takes heed of what you're saying, although I'm not optimistic. In any case, I'd love to see the look on Trumpkopf's face at even a 25 point increase. I'll bet the red will show right through the Orange Rust-Oleum.
"I see no signs that politics is driving his leadership at the Fed." - my one concern has been the task forces, especially the AI one. It appears he has a prior (perhaps not politically driven) that AI productivity will naturally bring inflation down and thus rates don't need to be raised. This prior really feels unjustified and matches what was said by other Trump administration individuals.
Thank you for explaining what a modest hike can and cannot do. We find the valuation effect easy to overlook: if an investor’s required return on a perpetual cash flow rises from 10% to 10.25%, its value falls about 2.4% even when the cash flow is unchanged. A quarter-point can matter without curing the supply shock.
Super vérité encore et bien dit claudia sahm la réserve federale devrait relever ses taux mercredi.cest Pourquoi telle hausse peux faire,ce qu'elle ne peux pas faire, et c'est vraiment impotantes les explication sont relever a tous moment
I'd think failure to raise rates could lead to higher long-term rates, with the market concerned that the Fed will not act to tame inflation.
Warsh not giving an adequate explanation for the Fed's actions would likely add to concern and uncertainty. Has Warsh given an indication that he understands the difference between foreward guidance and explaining his and the Fed's rationale and reaction function?
Has the Fed failed to raise rates when the fed futures forecast was above 90% that they'd raise?
"Warsh was Trump's pick for Fed Chair, but so far, I see no signs that politics is driving his leadership at the Fed."
When you say 'leadership' you specifically mean 'actual votes', I assume. Because his statements are very clearly designed either for an audience of one or in a largely futile effort to convince everyone else that he isn't playing to an audience of one. (C.f. his very loud tough talk about inflation-fighting when he voted against a rate hike, and his very loud conciliatory talk when he did.)
And even well before Trump existed as the phenomenon he currently embodies, Warsh has been a loud proponent of punitive interest rates when Democrats are in power, only to instantly lose that 'discipline' when a Republican is elected president.
Given those two things, I would tend to think that your statement involves a remarkable amount of optimism, rather than a clear-eyed look at the man. Indeed, I can't imagine that he will do anything other than vote with the majority until and unless Trump is able to appoint enough obedient servants of chaos that Warsh can steer things in the direction he (and Trump; the two are of one mind in this case) prefers.
The framing here is margins or consumer prices, as though the split is set by policy. It is set by pricing power. Firms that hold it pass the cost through. Firms that do not absorb it and call the result discipline. A demand tool does not compress margins evenly across an economy. It sorts firms by who was already able to say no.
Between the Scylla of tariff and trade war costs and the Charybdis of the ongoing global energy price shocks due to the ongoing de facto closure of both Straits, I believe Warsh will again vote to hold as the recession risk will be more immediately and politically painful than the longer term inflation threat. He'll be too happy to let "I'm the House" Bessent wrestle alone with an enraged bond market in a fight Bessent himself picked. Also, his boss and the stock markets won't like a hike; but that's greed, not a technical reason. As for his credibility if he votes to hold, well, that might be the only thing deflating around here.
Warsh, like every Trump appointee has passed a loyalty test already. Somehow he will be more dovish than you expect. Whether he votes to hold this week and surprises people or in his remarks suggests that further raises will be less likely than people think. In an obvious hike situation he will have some surprising twist which attempts to placate his boss.
Per WSJ 9/17/26 "The Trillion-Dollar Question: Did Warsh Really Seek Trump’s Blessing to Hike Rates?"
"Wednesday evening, shortly after Trump’s new Fed Chairman Kevin Warsh led the board toward a unanimous vote to increase interest rates, the president revealed that they had discussed this very decision beforehand.
“I talked to Kevin,” Trump told reporters. “I said ‘you might as well vote with the board because it’s not going to matter.’ The board is very hostile. They are very political. They are doing the wrong thing. They are a bunch of politicians.”
The bond market is raising rates without the Fed's input. At this point, it may not really matter what the fed does. The credibility of the whole US is shot. The Fed's credibility , or lack thereof, is just collateral damage.
It will end up hiking close to a recession. AI investment is hitting an inflection point. That is the last prop to the economy. But hiking at this point is probably the less risky course of action. If we get a bull flattener in bonds the move will be modestly successful in the short run.
Businesses either raise consumer prices to cover the costs or absorb them in tighter profit margins. By taking a little demand out of the economy, a modest rate increase can push more of those costs into margins and less into consumer prices.
Thank you for your post @Claudia Sahm. The second sentence here. It’s not clear to me why this is the case? Why does a modest rate increase do this? Many thanks
the "don't chase energy with rates" point is the right constraint... the hike is about keeping core expectations anchored while supply shocks pass through. modest moves, clear rationale, no overreaction
The UST10 yield kissed 5.017% today, which invited significant buying, backing that yield to 4.95% for a quick trade profit, resulting in a ratcheting up to 5.001% then a close at 4.988%.
IMO, the bond market is signaling two things:
1) an acceptance of the Bessent audacious challenge that, "I am the house" with conviction.
2) an unequivocal rejection of the Trump inflationary economic policies, the toxin of which has now infested globally.
Maybe I'm ignorant, but I fail to see any link between not lowering the funds rate to Trump's threat to cut off trade with “some countries."
I can't wait to see his infuriated reaction to a 25 bps rate hike. It's great to see Trump angry. It would be just as great if voters get just as angry to ensure a blue tsunami at midterms.
I’m just as puzzled by the “some countries” threat. What did Natalie have in mind?
Spot on Claudia!
The Committee will make the decision they deem best. I wouldn’t read much into the fact that a hold would be a shock to the futures markets. Those market prices have moved a lot in the last week with the inflation data which frankly wasn’t very hawkish or dovish IMO. We came into the quiet period with the members speaking and the market interpreting their comments as basically 50-50 so the whole market reaction is traders anticipating reaction functions from voters who are in the quiet period.
Warsh has spoken about wanting to break the “hall of mirrors” where the committee uses market prices to infer beliefs and optimal policy, but the market prices reflect endogenous beliefs about the committee’s choices. A hold would break this cycle. Before the last FOMC, I wrote about the FOMC communication policy and how a change from past market guiding practices could increase the term premium (see my substack)
That said, I do think a hike is in order, but it won’t be as contractionary as one might think. The long end of the curve has tightened considerably. There are real drivers, but I think we also have some Lorenzoni & Werning (2019) style slow runs on the high debt countries. In these types of cycles, a credible central bank matters a lot. I wouldn’t be at all surprised to see a hike in the policy rate combined with a well worded statement and PC arrest the rise in long-term yields and flatten the curve. This would be a wash in terms of tightening financial conditions.
I think you are completely correct to note the SEP and the Chairs PC will matter a lot. Here, ironically Trump’s lobbying and threats may help him achieve his goals in a way he doesn’t realize. If the committee votes to raise and the Chair gets questions about independence it’s a perfect opportunity to reiterate that the FOMC is independent. A claim that will be more credible after a rate increase in the wake of Trump’s lobbying. If the market believes the Fed is credibly committed to the nominal anchor and will ignore politics the Fed ironically may not have to raise rates as much as they would in the absence of this market trust.
Finally, a word about inflation. Even though the probability of a rate hike in September has shot up in the past week, the market’s beliefs about inflation are well anchored. You can see this in the futures prices for the policy path that increased only slightly for June27 onward. In other words, the total amount of rate increases didn’t change much, just the timing of them. Also, the spread around the path implied by SOFR options has decreased since the inflation reports. Investors are more confident in their beliefs about the policy path!
I hope Warsh takes heed of what you're saying, although I'm not optimistic. In any case, I'd love to see the look on Trumpkopf's face at even a 25 point increase. I'll bet the red will show right through the Orange Rust-Oleum.
"I see no signs that politics is driving his leadership at the Fed." - my one concern has been the task forces, especially the AI one. It appears he has a prior (perhaps not politically driven) that AI productivity will naturally bring inflation down and thus rates don't need to be raised. This prior really feels unjustified and matches what was said by other Trump administration individuals.
But, tomorrow is the real test.
Thank you for explaining what a modest hike can and cannot do. We find the valuation effect easy to overlook: if an investor’s required return on a perpetual cash flow rises from 10% to 10.25%, its value falls about 2.4% even when the cash flow is unchanged. A quarter-point can matter without curing the supply shock.
Super vérité encore et bien dit claudia sahm la réserve federale devrait relever ses taux mercredi.cest Pourquoi telle hausse peux faire,ce qu'elle ne peux pas faire, et c'est vraiment impotantes les explication sont relever a tous moment
I'd think failure to raise rates could lead to higher long-term rates, with the market concerned that the Fed will not act to tame inflation.
Warsh not giving an adequate explanation for the Fed's actions would likely add to concern and uncertainty. Has Warsh given an indication that he understands the difference between foreward guidance and explaining his and the Fed's rationale and reaction function?
Has the Fed failed to raise rates when the fed futures forecast was above 90% that they'd raise?
"Warsh was Trump's pick for Fed Chair, but so far, I see no signs that politics is driving his leadership at the Fed."
When you say 'leadership' you specifically mean 'actual votes', I assume. Because his statements are very clearly designed either for an audience of one or in a largely futile effort to convince everyone else that he isn't playing to an audience of one. (C.f. his very loud tough talk about inflation-fighting when he voted against a rate hike, and his very loud conciliatory talk when he did.)
And even well before Trump existed as the phenomenon he currently embodies, Warsh has been a loud proponent of punitive interest rates when Democrats are in power, only to instantly lose that 'discipline' when a Republican is elected president.
Given those two things, I would tend to think that your statement involves a remarkable amount of optimism, rather than a clear-eyed look at the man. Indeed, I can't imagine that he will do anything other than vote with the majority until and unless Trump is able to appoint enough obedient servants of chaos that Warsh can steer things in the direction he (and Trump; the two are of one mind in this case) prefers.
The framing here is margins or consumer prices, as though the split is set by policy. It is set by pricing power. Firms that hold it pass the cost through. Firms that do not absorb it and call the result discipline. A demand tool does not compress margins evenly across an economy. It sorts firms by who was already able to say no.
Between the Scylla of tariff and trade war costs and the Charybdis of the ongoing global energy price shocks due to the ongoing de facto closure of both Straits, I believe Warsh will again vote to hold as the recession risk will be more immediately and politically painful than the longer term inflation threat. He'll be too happy to let "I'm the House" Bessent wrestle alone with an enraged bond market in a fight Bessent himself picked. Also, his boss and the stock markets won't like a hike; but that's greed, not a technical reason. As for his credibility if he votes to hold, well, that might be the only thing deflating around here.
Even if he does vote to hold, he'll be in the minority.
Not that I'd expect much explanation from him however he votes and the larger committee, but I think he's facing a Hobson's Choice.
Warsh, like every Trump appointee has passed a loyalty test already. Somehow he will be more dovish than you expect. Whether he votes to hold this week and surprises people or in his remarks suggests that further raises will be less likely than people think. In an obvious hike situation he will have some surprising twist which attempts to placate his boss.
Still on a leash.
Per WSJ 9/17/26 "The Trillion-Dollar Question: Did Warsh Really Seek Trump’s Blessing to Hike Rates?"
"Wednesday evening, shortly after Trump’s new Fed Chairman Kevin Warsh led the board toward a unanimous vote to increase interest rates, the president revealed that they had discussed this very decision beforehand.
“I talked to Kevin,” Trump told reporters. “I said ‘you might as well vote with the board because it’s not going to matter.’ The board is very hostile. They are very political. They are doing the wrong thing. They are a bunch of politicians.”
The bond market is raising rates without the Fed's input. At this point, it may not really matter what the fed does. The credibility of the whole US is shot. The Fed's credibility , or lack thereof, is just collateral damage.
True, but it's worth a modest increase, if for no other reason than to see Trumpkopf stroke out over it.
It will end up hiking close to a recession. AI investment is hitting an inflection point. That is the last prop to the economy. But hiking at this point is probably the less risky course of action. If we get a bull flattener in bonds the move will be modestly successful in the short run.
Businesses either raise consumer prices to cover the costs or absorb them in tighter profit margins. By taking a little demand out of the economy, a modest rate increase can push more of those costs into margins and less into consumer prices.
Thank you for your post @Claudia Sahm. The second sentence here. It’s not clear to me why this is the case? Why does a modest rate increase do this? Many thanks
the "don't chase energy with rates" point is the right constraint... the hike is about keeping core expectations anchored while supply shocks pass through. modest moves, clear rationale, no overreaction