Bond investors are signaling concern that the Fed is behind inflation as Kevin Warsh prepares to lead the central bank after hotter April price data.
Bond investors are signaling that the Federal Reserve may need to shift from an easing bias toward a more restrictive stance as Kevin Warsh prepares to take over the central bank, according to Ed Yardeni, president of Yardeni Research.
Yardeni said Wall Street expects the Federal Open Market Committee to drop its bias toward lower rates at next month’s policy meeting. Bond traders, he said, are looking for something stronger: an indication that policymakers are willing to tighten if inflation keeps running above target.
The signal Yardeni pointed to is the 2-year U.S. Treasury yield trading above the federal funds rate. In his view, that reflects investor concern that the current policy rate is not high enough to bring inflation back under control.
“The market is signaling that the current FFR is too low to curb inflation and may have to be hiked,” Yardeni wrote in a Wednesday note to clients.
The debate has sharpened after a string of inflation reports showed renewed price pressure following the Iran war. April consumer prices rose 3.8% from a year earlier, the fastest annual pace since 2023. Wholesale inflation rose 6% over 12 months, its quickest rate since 2022.
The figures complicate the backdrop for Warsh, President Donald Trump’s pick to succeed Jerome Powell as Fed chair. Warsh was confirmed by the Senate this week, and Treasury Secretary Scott Bessent referred Thursday to the approaching start of the “Warsh Fed.” Bessent said Warsh will begin after Powell’s term ends Friday.
Trump has long pushed the Fed to lower interest rates, arguing that cheaper borrowing would help the economy. Markets, however, have moved in the opposite direction: Fed funds futures traders are pricing in no rate cuts for the rest of the year, according to CME Group’s FedWatch tool, and the probability assigned to a rate hike has risen in recent days.
Bessent offered a more benign view of the inflation shock, telling CNBC that he expects one or two more hot inflation readings before “substantial disinflation.” He said the energy-driven surge is likely to reverse because the United States is “going to keep pumping” oil, easing the supply disruption tied to the Iran war.
That split captures the immediate challenge facing Warsh: investors want evidence the Fed will not fall behind another inflation flare-up, while the Treasury chief is urging patience on the grounds that the latest pressure may prove temporary. The next policy meeting will show whether the central bank simply removes its easing tilt or sends a firmer message about possible tightening.
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