The temperature was 81 degrees in Sintra, Portugal, today. Tomorrow it will be 101 degrees. Fed Chair Kevin Warsh spoke on a panel in Sintra today. He was cool as a cucumber. This was his second public appearance since his first press conference as the new Fed chair on June 17. Back then, he was surprisingly hawkish, stressing that he and his colleagues on the FOMC are committed to restoring price stability.
At Sintra, Warsh reiterated that pledge and explicitly stated that price stability means lowering inflation to the Fed's 2.0% target. The former has exceeded the latter for more than five years. He refused to provide any forward guidance in response to several questions by moderator Sara Eisen. Instead, he repeated that as Fed chair, he won't provide any forward guidance. Instead, he wants the financial markets to provide guidance to the Fed about the proper course for monetary policy.
In effect, Warsh will be guided by the Bond Vigilantes. He said today that he was pleased to see that since his presser, measures of expected inflation in the fixed-income markets have moderated. That's correct. The 10-year bond yield has declined in recent weeks. The yield spread between the 10-year Treasury nominal and TIPS bonds has narrowed to 2.23%. And the 10-year forward breakeven inflation rate has dropped to 2.30% (charts).
