Huge Volatility After Fed, But The Coming Days Will Tell The Story

Bonds ended the day only modestly worse off than yesterday afternoon. That's a pretty impressive accomplishment considering the Fed hiked rates and communicated at least one more rate hike in 2026. Nearly half the FOMC sees at least 2 more hikes in this cycle. Warsh's comments ratcheted up the hawkishness considerably. Intraday market movement told a completely different story compared to the modest day-over-day change. The rate hike itself had no impact. Case in point bonds didn't move from 2pm to 2:30pm ET. It was only after Warsh's press conference began that bonds progressively tanked. So what was the x factor? In a nutshell, Warsh said the economy was strengthening, the Fed's focus is primarily on inflation (instead of labor market), and inflation trends haven't improved. This isn't one shocking revelation, but rather a coherent justification for a hawkish Fed policy stance that likely involves additional rate hikes with broad support from the committee. Had this been a token rate hike followed by a press conference in which Warsh expressed concern about whether the hike would ultimately prove to be justified, bonds may not have reacted nearly as much. As it stands, it's something of a sea-change from Warsh and sounds a lot more like a fairly substantial shift in the Fed's policy regime. While this is ultimately what's needed when it comes to lower mortgage rates in the future, the unmitigated level of hawkishness pushes the turning point farther into that future than a half-hearted rate hike would have.