Warsh Fails First Credibility Test: Bond Vigilantes Want More Than Hawkish Squawks

Fed officials just won't listen to us! We warned them that the economy didn't need the four cuts in the federal funds rate (FFR) at the end of 2024. The Bond Vigilantes agreed with us and pushed the 10-year Treasury bond yield up by 100bps at the time (chart). The same happened late last year. The Fed lowered the FFR three times. The bond yield drifted higher and continued to do so this year.

We correctly anticipated that the FOMC would pivot from its dovish stance in April to a hawkish stance in June. Then we predicted that the committee would follow up with a rate hike in July. They didn't listen to us. 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.