Fed Chair Warsh said ending forward guidance lets markets tighten financial conditions. The 10-year yield jumped 9 bps to 4.69%, the 30-year hit 5.21%.
The S&P 500 fell 138 points in the 65 minutes between Fed Chair Warsh's press conference and the close. The index ended the day down 1.52%. The Dow lost 2.19%. The Nasdaq dropped 1.74%.
The Fed left rates unchanged. Three members dissented in favor of a hike. Warsh did not offer clues on the September meeting. But he repeatedly discussed how ending forward guidance was already working. That struck markets.
Long-term Treasury yields spiked. The 10-year yield rose 9 basis points to 4.69%. The 30-year yield jumped 12 basis points to 5.21%, the highest since July 2007. Short-term yields fell. The 2-month yield dropped 9 basis points, undoing the spike that had priced in a rate hike. The 6-month yield fell 8 basis points to 3.95%.
Warsh said the reduction in forward guidance had let markets react to real data. "Market participants are learning to play the ball, not the referee," he said. He described the tightening in nominal and real rates as among the most significant in two decades.
The move steepened the yield curve. Longer-term rates, which track growth and inflation expectations, rose as markets priced in stronger economic data. Short-term rates, tied to Fed policy expectations, fell after the no-hike decision removed the chance of an immediate increase.
For the economy, the rise in the 10-year yield directly affects 30-year fixed mortgage rates and corporate borrowing costs. The 30-year Treasury at 5.21% pushes mortgage rates higher. Floating-rate loans tied to SOFR were unchanged because the Fed held its policy rate.
Warsh emphasized that markets had done the tightening the Fed had not. "Rates are higher today than they were 42 days ago," he said. "Markets have made decisions in part because we stepped back from trying to influence those."
The Fed chair said he was "comforted" that markets were reacting to economic data rather than Fed speeches. He said the unfiltered market signal would help the Fed judge inflation and employment.
The S&P 500's late-session reversal erased earlier gains. The SPDR S&P 500 ETF (SPY) fell 1.5%. The iShares 20+ Year Treasury Bond ETF (TLT) dropped more than 2% as long-duration bonds sold off. Rate-sensitive sectors like real estate and utilities fell. Financials also declined even as the yield curve steepened.
The next FOMC meeting is in September. Warsh gave no indication of the rate path. The 30-year yield closed at 5.21%, a level not seen since July 2007.
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