Fed's Warsh Falls Short of Calling a December Hike: The Market Is Doing It for Him

Fed Chair Kevin Warsh built his central-banking career on a reputation as an inflation hawk.

On Wednesday, he stopped short of proving it. But a subtler thought sat behind his words: the bond market may already be doing the tightening for him.

The Federal Reserve held rates at 3.75%-4%, even though two officials voted for a hike. At his press conference, Warsh then refused to commit to a December increase.

“I don’t believe in forward guidance absent exigent circumstances,” Warsh said. “I also don’t believe in pre-judging meetings.”

The reason for his patience came in a single sentence.

“Since our policy action in September, we have started to see some changes in financial and credit conditions,” he said.

The Market Has Been Tightening Since September

Those changes show up clearly in the bond market.

The 10-year Treasury yield has climbed about 25 basis points since early September, to 5.04%. It closed as high as 5.31% on Oct. 5.

The 30-year yield touched 5.67% in early October. Meanwhile, the two-year yield, which tracks Fed expectations most closely, has risen about 34 basis points over the same period, to 4.71%.

Those rates set the cost of mortgages and corporate debt. In other words, borrowing has become more expensive across the economy, well beyond what the Fed decided in September.

Fed futures currently show an 85% chance of another rate hike in December, according to the CME FedWatch tool.

In effect, the market has already done some of the tightening for Warsh.

‘Interest Rates Get in the Cracks’

Warsh then went further when asked whether higher rates can slow the artificial-intelligence boom.

“Interest rates get in the cracks,” Warsh said. Investors have become more selective since early September, he added, and credit spreads for certain assets have widened.

CoreWeave Inc. (NASDAQ:CRWV) shows where those cracks are. The AI cloud provider has funded its data-center buildout largely with debt.

Its shares have fallen 30% since early September, to about $62. Its bonds have traded at yields near 15%, levels usually seen in distressed debt.

The pressure goes beyond one company. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) has lost 2% over the same period.

Warsh said the market reaction to the September hike has been “broadly consistent with my expectations.”

However, he also said financial conditions have tightened somewhat, but “not significantly.”

Why a Hike Today Could Have Hurt More

That is the tension behind Wednesday’s hold.

Markets have been raising borrowing costs on their own for nearly two months. With the 10-year yield above 5% and AI borrowers under strain, a second hike could have added pain on top of the pressure markets are already applying.

Warsh did not say that directly. Instead, he said “the information we receive over the coming period will help us determine where we want policy to be.”

The Hawk Has Not Left the Room

Warsh still sounded like a hawk on inflation itself. He said prices have run above the Fed’s 2% target for close to six years.

“There’s no soft inflation target. There’s no implicit inflation target,” he said.

He also admitted the job is unfinished. “If the crux of your question is, you haven’t delivered yet, you haven’t achieved price stability, you’re right about that, but we’re working on it,” Warsh said.

Governor Lisa Cook and Cleveland Fed President Beth Hammack wanted to act now. “We just came out of a heck of a family fight,” Warsh said.

For now, the bond market is doing part of the Fed’s job. December will show whether Warsh thinks it is doing enough.

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