The abandonment of forward guidance and the shift toward complete data dependence, initiated by Kevin Warsh, have left markets at a loss. The new Fed Chair has made it unequivocally clear: the central bank will no longer smooth market volatility, and participants must react to macroeconomic data rather than attempt to front-run the regulator’s moves. However, this paradigm shift has birthed a glaring paradox: despite an increasing chorus of “hawkish” rhetoric from FOMC officials, market expectations for monetary policy tightening are actually declining. This dysfunction has triggered a sharp sell-off in the US dollar, raising a critical question: is this trend sustainable?
The “data over Fed rhetoric” strategy, championed by Warsh back in June, received his own positive endorsement in July. Treasury yields have ticked higher, and inflation expectations remain anchored near target levels. On the surface, the model appears to be working, suggesting that financial markets are independently performing the central bank’s job of monetary tightening, thereby cooling inflation without direct regulatory intervention.
However, the reality is far more prosaic. The synchronous sell-off in equity indices, the spike in government bond yields, and the dollar’s decline point not to a triumph of market self-regulation, but to mounting panic. Investors have interpreted Warsh’s willingness to offload the burden of fighting inflation onto the market as a signal that the Fed will continue to delay inevitable rate hikes. Consequently, the probability of monetary tightening in September has dropped from 75% to 65%, serving as the primary catalyst for the latest EUR/USD rally.
The fundamental problem is that the Fed Chair’s new approach is failing to gain traction among his colleagues. While many committee members remain wavering, three officials—Neel Kashkari, Beth Hammack, and Lorie Logan—have openly voted for a rate hike. The formation of such a formidable coalition of dissenters has not been seen within the FOMC since September 2016, signaling a deep ideological rift within the central bank.
Major investment banks are already noting the mounting tension. Goldman Sachs emphasizes that the Fed is gradually losing patience with persistent inflation, shifting toward a more hawkish stance. Analysts at JPMorgan go a step further, pointing out that Warsh has yet to clearly articulate the mechanisms by which he intends to achieve the inflation target under his new doctrine. This ambiguity will inevitably compel the rest of the FOMC to take more decisive action in fulfillment of their mandate. It is hard to disagree with this assessment: US monetary policy is governed by a committee, not by a one-man show.
