“Expectations of future inflation have come down. Inflation risks have come down.” That was Fed chair Kevin Warsh this week at a central-banking forum in Sintra, Portugal. Good news, right? Keep reading.
In the same appearance, Warsh refused to say whether a rate hike should be on the table at the July 28–29 meeting. He wants a “good family fight” among colleagues first.
And he had a warning. Anyone expecting the Fed to tolerate inflation above 2%, he said, “would be disappointed.”
The Fed has held its benchmark rate — the interest rate that other rates follow — at 3.5% to 3.75% all year. The question is which direction it moves next.
Credit where due: Warsh points to his own hard line, plus a drop in energy prices after the Iran deal.
A split committee
Of the 18 officials who submitted projections last month, nine saw higher rates warranted by year-end. Eight favored holding. One penciled in a cut.
Nine to eight to one. That’s not a consensus. That’s a coin flip with a rounding error.
So the July meeting is genuinely live. Not for a cut — for a possible hike.
A strong June jobs report, due Thursday, or a firmer inflation reading could embolden the hawks — the officials who lean toward higher rates.
Politics is circling, too. White House adviser Kevin Hassett called a hike a “macroeconomic mistake” and suggested some officials might raise rates to “get Trump.” Warsh insisted the Fed stays independent: “We are calling balls and strikes as best we can.”
The verb switch
Now zoom out, because this is the part that matters for your money.
Twelve months ago, the Fed’s debate was when to cut. Today the debate is whether to hike. The verb changed.
For anyone drawing income from bonds, that switch matters more than any single meeting.
Why the change? The economy is running hot on the AI build-out, and a stock rally is lifting spending by high earners. Even if headline inflation eases, strong growth can keep underlying prices sticky above 2%.
A bond ladder still built for last year’s pivot is fighting last year’s war.
Retirees feel this decision in their monthly income. That’s why we track the verbs, not just the votes.
Don’t buy the pivot
We’ve positioned for higher-for-longer since the spring, and nothing this week changes that.
Short-duration Treasuries actually pay you now. The 2-year yields 4.16%. The 10-year yields 4.47%. Duration — how much a bond’s price swings when rates move — is the risk we’re choosing not to take.
We tilt toward durable cash flow instead of long-duration bets, and we hold a gold sleeve as ballast in case inflation reaccelerates.
The mistake to avoid is simple to name. Don’t buy long bonds in anticipation of cuts that the committee itself is no longer sure are coming.
When the Fed can’t agree on direction, your plan’s job isn’t to guess the winner. It’s to get paid while they argue.
At 4%-plus on the short end, the waiting room finally has decent coffee.