Bond investors express skepticism over potential Fed rate hikes under Kevin Warsh

Kevin Warsh has been running the Federal Reserve for about 100 days, and the bond market has already made up its mind: it doesn’t believe him.

Following the Fed’s late July 2026 policy meeting, where rates were held steady, 30-year Treasury yields surged 14 basis points to nearly 5.23%. Meanwhile, short-term bond yields actually fell, steepening the yield curve.

The credibility gap

Warsh took the helm in May 2026 with a reputation as a monetary hawk. He scrapped the Fed’s longstanding practice of forward guidance and installed what he calls a “data-driven approach,” meaning the Fed will react to economic conditions as they come rather than committing to a path months in advance.

July 2026 PCE inflation clocked in at 3.7%, nearly double the Fed’s 2% target. Warsh acknowledged the Fed has “work to do” if inflation trends don’t improve, but acknowledgment and action are two very different things.

At the Jackson Hole symposium on August 28, marking his 100th day in office, Warsh noted that financial conditions are not restrictive. CME FedWatch data showed the speech bumped September rate-hike odds to roughly 57%, implying a 25-basis-point increase at the mid-September meeting.

A coin-flip probability for a rate hike when inflation is running at 3.7% tells you everything about how the market views Warsh’s resolve.

Why the bond market is revolting

The post-meeting price action was telling. Short-term yields dropped, reflecting the market’s belief that rates won’t rise meaningfully in the near term. Long-term yields spiked, reflecting the belief that this inaction will cost everyone later.

Warsh’s decision to abandon forward guidance adds another layer of uncertainty. Without it, every data release and every Warsh speech becomes a potential catalyst for volatility, and when risk is hard to price, markets tend to demand a premium. That premium is showing up in long-end yields.

The balance sheet question

Warsh has also signaled interest in shrinking the Fed’s balance sheet, which ballooned during successive rounds of quantitative easing. A smaller balance sheet would reduce the Fed’s footprint in the Treasury market, potentially adding upward pressure on yields as a major buyer steps back.

Combined with rate-hike uncertainty, balance sheet reduction would amount to a double tightening: less bond-buying from the Fed and potentially higher short-term rates.

The September meeting will be the first real test. A 25-basis-point hike at roughly coin-flip odds would represent Warsh’s first rate increase as chair and his first concrete step toward backing up months of tough rhetoric.