Warsh's case for letting long yields tighten collides with an 87% priced hike

The residual on that 87% is 13%, and the 13% is the outcome Warsh's own reasoning argues for ^[1][16]. Warsh's stated position is that higher longer-term yields, and not a move in the fed funds rate, could be the way to get inflation back to the 2% target he calls the top priority ^[5][4]. He has also cautioned against Fed moves based on one or two data points ^[6]. Both arguments point at a hold, and traders have put 13% on it.

Wells Fargo's economists think the data has already settled it. The run of inflation numbers, they say, meets the low bar to hike that Warsh laid out at Jackson Hole ^[8]. They do not like the reasoning: they "are deeply skeptical of tighter monetary policy as an antidote to energy-induced inflation, but right now it's the Fed's world and we're just living in it," they said ^[9].

Then the size question. Wells Fargo says two is a good starting point for hikes, though "this could just as easily be a one and done if inflation cooperates" ^[10]. Samuel Smith, writing for Seeking Alpha, expects a quarter point and says that "at most, it will likely only hike one more time, as there are too many countervailing factors against a fresh, aggressive rate-hiking cycle" ^[13]. Add this week's quarter point to Smith's one more and you get 50 basis points as a ceiling; two hikes as a starting point is 50 basis points as a floor ^[17].

The argument that the hike is cosmetic comes from the people who expect it. Wells Fargo call one and done "so silly to us (it has no practical impact on anything - inflation or growth)", and read the chairman's calculus as "I showed them I am willing to do it, and it will have limited to no impact on growth." ^[11] If a quarter point does nothing to inflation or growth, the tightening that counts is happening in the 10-year, which is close to settling at 5% for the first time since the Financial Crisis ^[2].

Trump has threatened to cut off all trade with major partners if the Fed does not cut ^[7]. From outside the building, a hold justified by 5% long yields looks like a hold delivered under that threat, and Seeking Alpha's note says the Fed will face accusations of favoring one side ahead of the midterms whichever way it goes ^[14].

I would expect the quarter point, because both readings on the record expect it and one of them says the data clears Warsh's own bar ^[8][13]. What decides how duration trades is whether the statement credits long-term yields as the tightening channel. If it does, a single hike caps nothing above it. If instead Warsh endorses the two-hike start ^[10], the bond market's 5% was additive and the substitution argument was rhetoric, which would make this reading wrong. The account does not give an earlier level for the 10-year, so I cannot say how big the tightening already delivered was ^[18].

The week's earnings calendar is light, and Lennar reports on decision day, between Dave & Buster's on Monday and Carnival on Thursday ^[15].