The fourth dissent came from the US Treasury market

The US Treasury market reacted negatively to what it heard, or perhaps more importantly, did not hear, from Federal Reserve Chair Warsh last week. 

He spoke confidently about the Fed’s commitment to bringing inflation down but offered little detail on how it plans to do so. Investors hoping for any sort of forward guidance were left disappointed. Adding to the uncertainty in the inflation fight, Chair Warsh also suggested the Fed may look at a broader set of data rather than relying heavily on the PCE Index. This raises the possibility of a more meaningful shift in how this Fed views the definition of inflation. 

The new chair called for a “good family fight” at last week’s Federal Open Market Committee meeting, and it seems he got one. Division emerged as the Committee voted 9-3 in favor of holding rates at the current level, with the three dissents in favor of a 25 basis-point hike. 

But the market voted, too. As Chair Warsh spoke from the podium on Wednesday, the long end of the Treasury yield curve steepened, with the 30-year yield reaching north of 5.2%, the highest in almost two decades. That move suggests investors expect inflation to remain persistent, or at the very least were dissatisfied with Chair Warsh’s lack of clarity. Ironically, during the press conference, he referred to higher interest rates as having already tightened financial conditions, implying that the market already had done some of the Fed’s work for it. Investors still expect one hike in September.

In other economic data last week, second-quarter GDP growth came in at 1.5%, below expectations, but most underlying trends were supportive. Consumer and business investment were strong, but a decline in net exports, driven by substantial AI-related imports, weighed down the overall growth rate. This week’s data will be headlined by the US unemployment report on Friday, which is expected to remain at a healthy 4.2%.