Yardeni Research Says Warsh 'Fails First Credibility Test' As 30-Year Treasury Yield Tops 5%

• The U.S. 10 Year Treasury climbed to 4.683%. 
• Yardeni Research said in a post on Wednesday that the Fed has to raise short-term rates to lower long-term rates and that a hawkish stance without acting on it reduces the Fed's credibility. 
• Peter Schiff, CEO of Euro Pacific Capital, also noted that the bond market is giving the Fed’s decision to choose inflation “a thumbs-down.”

The Federal Reserve left its benchmark interest rate unchanged on Wednesday, keeping it at a range of 3.5% to 3.75%, largely in line with market expectations. 

However, following the announcement, the yield on the 30-year U.S. Treasury bond spiked over 5%, touching levels not seen since the global financial crisis of 2007. The U.S. 10 Year Treasury climbed to 4.683%. 

Yardeni: Bond Vigilantes Want Action, Not Hawkish Talk

“Once again, the Bond Vigilantes are pushing bond yields higher. In effect, they are saying that if the Fed won't be vigilant about inflation, then they will have to maintain law and order in the economy,” Yardeni Research said in a post titled ‘Warsh Fails First Credibility Test: Bond Vigilantes Want More Than Hawkish Squawks.’

“Under the circumstances, we conclude that the Fed has to raise short-term rates to lower long-term rates. Talking hawkish but not acting so reduces the Fed's credibility,” Ed Yardeni, president of Yardeni Research, said in the post. 

“Delivering price stability is exactly what the Bond Vigilantes want the Fed to do,” he added.

Warsh’s Second Fed Meet Ends With A Divided Fed 

The U.S. Federal Reserve kept interest rates unchanged at Kevin Warsh’s second policy meeting as chair, citing persistent inflation and continued strength in the labour market. The decision, approved by the Federal Open Market Committee in a 9–3 vote, marked the central bank’s fifth straight meeting without a rate change. 

“Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability,” the Fed said in its monetary policy statement.

Meanwhile, Warsh said in a press conference that the Fed will stick to the 2% target and not soften targets. "We'll be continuing to watch that market information, see how it responds to incoming events. And that can help inform our decision-making when we meet in seven or eight weeks," he said. 

Schiff, Gundlach Echo Bond Market Concerns

Meanwhile, Peter Schiff, CEO of Euro Pacific Capital, said that the bond market is giving the Fed’s decision to choose inflation “a thumbs-down.” In a post on X, the economist said, “The Fed may have held short-term interest rates steady, but the market is raising long-term rates as investors choose to sell Treasuries and buy gold.”

DoubleLine Capital CEO Jeffrey Gundlach said in a CNBC interview that the Federal Reserve will have to shift gears to do more than talk tough. 

“If you really want to get to 2%, I think you have to raise interest rates,” Gundlach said after the Fed’s latest policy decision. “I think getting 2% is going to take a long time. We might not get there over the course of the next couple of years.”

How Are Markets Reacting?

At the time of writing, the iShares 20+ Year Treasury Bond ETF (TLT), which tracks long-term U.S. government debt with maturities greater than twenty years, was down 0.30% amid ‘neutral’ sentiment. 

One user said, “$TLT When asked repeatedly during his press conference why the Fed has delayed — even with the consumer price index still rising at a 3.5% pace — he pointed to the jump in longer-term market rates as doing some of the Fed’s work for it.”

Another user said, “$TLT the Fed has proven time and time again that they will sacrifice bond investors to prop markets.”

The iShares 7-10 Year Treasury Bond ETF (IEF) was also down 0.21% amid ‘bearish’ sentiment. 

Meanwhile, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.42% amid ‘bearish’ sentiment. The Invesco QQQ Trust ETF (QQQ) and the SPDR Dow Jones Industrial Average ETF Trust (DIA) were up 0.65% and 0.20% respectively. 

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