According to available data, Federal Reserve Chairman Kevin Warsh is ready to support an interest rate hike at the September meeting if inflation data, to be published in the coming weeks, remains high.
According to a Financial Times report citing sources close to Warsh, the Fed Chairman is prepared to tighten monetary policy if inflation proves higher than expected, and if expectations for further increases in borrowing costs in the market rise.
Following this news, expectations for a rate hike in the markets have intensified. On the futures market, the probability of the Fed raising the discount rate by 25 basis points in September is estimated at approximately 55 percent. After the publication of the Financial Times article, this probability increased to 56.7 percent, and the yield on U.S. two-year Treasury notes rose by 4 basis points to 4.22 percent.
Fed Chairman Warsh's communication style has shaken the bond market.
Despite the market's reaction to the limited information provided by the Fed regarding its interest rate strategy, Warsh appears determined to maintain his simple and concise communication style.
Investors believe that Warsh has not provided sufficient guidance on how to curb a new wave of inflation triggered by the war with Iran and rising energy prices during the Donald Trump administration.
Following last week's Fed meeting, there was a sharp drop in U.S. Treasury bond prices, leading to a significant increase in the country's long-term borrowing costs. The yield on 30-year U.S. Treasury bonds exceeded 5.2 percent, reaching the highest level since 2007.
Some investors argued that the rise in bond yields was driven not only by energy prices and inflation risks, but also by Warsh's limited communication, which undermined confidence in the Fed's ability to control price growth.
According to sources close to Warsh, the Fed Chairman acknowledges that he made a series of communication mistakes during the first 10 weeks of his tenure at the helm of the world's largest central bank.
These mistakes include the Fed's failure to sufficiently emphasize its commitment to price stability and creating uncertainty about whether its long-term plans for restructuring the central bank would affect short-term interest rate decisions.
However, it was stated that Warsh and his team have no intention of abandoning the restructuring process initiated because the Fed failed to meet its 2% inflation target for more than five years.
Warsh's approach differs from the communication policy of previous Fed chairmen, who offered the markets comprehensive guidance. The new Fed Chairman wants investors to focus on economic data, not on central bank statements, and wants to speak less about the future course of interest rates.
However, U.S. President Donald Trump wants the Fed to lower interest rates, not raise them, and according to recent reports, he has frequently called the Fed Chairman on this issue since Warsh took office.
*This is not an investment recommendation.
