Is Kevin Warsh a sheep in wolf’s clothing?

And just like that, the honeymoon is over. The start of Kevin Warsh’s (still brief) tenure as chair of the Federal Reserve was marked by tough talk about the need for “regime change,” an exceedingly firm reaffirmation of the Fed’s commitment to deliver price stability, and a “no tolerance” pledge to drive inflation back to the Fed’s 2.0 percent target. Markets swiftly took heed, and comfort, as concerns that Warsh could be too easily swayed by a president who openly desired lower interest rates were dispelled in June by his first press conference, when he backed up his long-running reputation as an inflation hawk and doubled down on political independence.

But as the old saying goes, it takes a lifetime to build a reputation, and a minute to lose it. Or, in this case, a 45-minute press conference. That may be a bit harsh, but Warsh’s credibility—at least on the inflation front—was certainly dented this week.

He isn’t the first central banker to take a seat in the big chair only to stumble out of the gate, nor is the situation solely of his own making. Central bankers must learn the nuances of communicating with markets, and markets must learn to interpret and understand new central bank heads.

Press conference goes off the rails

All things considered, the meeting played out as anticipated. There was no interest rate hike, in line with consensus expectations; the policy statement was just as short and factual as it had been in June; and even the two dissents were not unexpected based on premeeting comments, with only a modest surprise from Minneapolis Fed President Kashkari opting to join the dissenters. In the end, markets barely budged—and then the words started flying.

It’s hard to say precisely what aspect of Walsh’s statement traders took issue with as the press conference proceeded, but perhaps the problem was simply what he didn’t say. Warsh hails from the political side of the financial world and is therefore adept at saying words without saying anything at all. But that might not fly as a central bank chair. We know he has no desire to provide forward guidance, and that’s fine, but markets still need to know what the Fed is thinking about, you know, things.

The closest Warsh came to a direct answer to anything was expressing his views on the Fed’s reaction function, stating that, “Any central banker, when he or she sees underlying inflation moving higher, he or she is more inclined to tighten policy. Again, when you’ve achieved the other side of your mandate, and you see underlying inflation falling, he’s more inclined to loosen policy.”

That dynamic may be another source of confusion. Core PCE inflation has been trending higher since fading to 2.6 percent in April 2025, and despite a modest downshift to 3.3 percent annually, the trend still looks like “two steps forward, one step back.” While Warsh is also no fan of economic forecasting, current consensus views—even after June’s soft inflation data—still have inflation missing the two percent target through at least 2027.

64 months of inflation above two percent seen extending into 2028

Given his prior tough talk on inflation, including his criticism that the Fed was too late raising rates in 2021 and 2022, is Kevin Warsh really going to now stand by and do nothing as 64 months of above-target inflation stretches to 70 months? Or 82 months?

In any case, the bond market reaction this week was not kind, and may be telling.

When holding rates steady moves them higher

Our own view was that the Fed would surprise markets with a rate hike this week, largely in pursuit of the goals previously discussed. We also felt that aggressive action could actually help cap the ongoing rise in longer-term Treasury yields, which feed more directly than short-term policy interest rates into consumer and corporate borrowing rates like mortgages and corporate bonds.

Instead, the Fed’s inaction in not raising short-term interest rates has pushed the 30-year Treasury yield to a 19-year high of 5.2 percent, with the 10-year not far behind at 4.7 percent. The two-year Treasury yield (which is more sensitive to the market’s interest rate expectations) has faded slightly this week on doubts about the Fed’s ability to follow through on its tough talk. But at 4.2 percent, it remains well above the current 3.6 percent policy rate, suggesting that the Fed will eventually have to do something.

30-year Treasury yield hits post-2007 high; other yields to follow?

With respect to the 30-year, after breaking 5.2 percent we see the next technical resistance level at 5.4 percent. But if that doesn’t hold, buckle up—in our view, the next notable resistance is at nearly 6.0 percent, a level not seen since the other tech boom of the late 1990s.

In his press conference, Warsh said the market had done the Fed’s job for it via higher yields. But without action from policymakers, the market could take that statement as a challenge—if indeed the Fed wants to outsource its job—and put more pressure on the central bank in the form of even loftier Treasury yields.

Where to from here?

Ironically, the next six weeks until the Fed’s Sept. 15-16 meeting—and the verdict on the Fed’s decision to stand pat this month—will likely depend on the economic data Warsh largely eschews. Tier 1 data like the Consumer and Producer Price reports, and to a lesser extent the Nonfarm Payrolls report, will determine whether the Fed was right to wait for more data.

But in an early read on price trends in July from business surveys, the S&P Global Flash PMI report found that, “Input cost inflation rose to its highest since May 2025, as cooler manufacturing cost growth was more than offset by a 14-month high in services. Selling price inflation also accelerated as firms passed higher costs on to customers, with the overall rise in charges the steepest since July 2022.” On top of that, with oil prices rising again and the Trump administration rebuilding the tariff wall, we find ourselves not quite as optimistic on the near-term inflation trajectory.

We still think a rate hike was simply deferred this month, and that the three dissenters at this month’s meeting could find more support among the Board of Governors in September. But whether Chair Warsh decides to go along with them could be the ultimate reveal of whether he is truly just a sheep in wolf’s clothing.

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