Warsh’s Silence Jolts Markets as U.S. Stock Traders Brace for Turbulence
The Federal Reserve’s fifth decision this year to leave interest rates unchanged exposed deep internal divisions: Three officials voted to support a rate hike. This year, investors have faced one uncertainty after another, from wars and tariff battles to persistently high inflation. Now they must confront another risk: a Federal Reserve that is unwilling to disclose the direction of policy. The conflict intensified dramatically this week. Fed Chair Kevin Warsh gave no indication during or after his news conference about whether or when the central bank might raise rates in response to continuing price increases. His silence was particularly perplexing because three of the 12 members of the Federal Open Market Committee voted for an immediate rate increase. The committee’s decisions are usually unanimous or passed by a very narrow margin. Traders were clearly shocked, triggering a frenzy in the final hour of Wednesday’s session. The S&P 500 plunged, suffering its worst selloff on a Fed decision day since December 2024. The yield on the 10-year U.S. Treasury note surged to its highest level since January 2025. The Chicago Board Options Exchange Volatility Index, or VIX, broke above 20, signaling heightened market fear. “I was frankly shocked by how bad that press conference was,” said Marta Norton, chief investment strategist at Empower. Wall Street professionals criticized Warsh’s performance harshly. They said the Fed’s previous guidance helped traders align themselves with policymakers’ thinking and therefore reduced market volatility. Investors now want a “higher uncertainty premium” to cover the risk that the central bank will be slow to fight inflation, Karl Schamotta, chief market strategist at Corpay, wrote in a research note. “Some might call it an ‘idiot risk premium,’ but I’m not going to comment on that.” What exactly was he saying? Analyzing the comments from Warsh’s news conference that confused markets. “The market is being forced to digest a series of factors that are occurring simultaneously, but the main thread that could be used as an anchor is gone. That used to be the Fed’s forward guidance,” said Joe Gilbert, a portfolio manager at Integrity Asset Management. Warsh took the opposite approach because he wanted the market to guide the central bank. In his words, investors are “learning to play the game instead of watching the referee.” Investors said the problem with Warsh’s sports metaphor is that the macroeconomic forces affecting stock prices have become increasingly unstable, making it extremely difficult simply to “play the game.” President Donald Trump is working to rebuild tariff barriers, while the war in Iran has caused sharp swings in oil prices and pushed up inflation expectations. Given the Fed’s role in setting short-term interest rates in response to these and other factors, the market believes that cutting off guidance has further amplified risks in an already highly volatile environment. “You’re a player on the field too; you’re not just the referee,” Norton said. The market’s turbulence over the final two days of the week was unmistakable. After plunging Wednesday afternoon, the S&P 500 rose at times on Thursday and early Friday, then reversed lower, rebounded again and ultimately closed higher. U.S. stocks have historically tested newly appointed Fed chairs in this way. But Norton said Warsh’s performance on Wednesday was unstable enough to turn the next interest-rate decision and the late-August Jackson Hole symposium into single-day events capable of sending stocks into turmoil. She is far from alone in holding that view. Investors should “get used to uncertainty,” Stuart Kaiser, head of U.S. equity trading strategy at Citi Global Markets, wrote in a research note on Thursday. “Looking ahead, less guidance from the Fed could mean that this happens more frequently.” Kaiser encouraged investors to use options on the Russell 2000 Index as the best way to trade the uncertainty and volatility generated by future central-bank meetings.
This year, investors have faced one uncertainty after another, from wars and tariff battles to persistently high inflation. Now they must confront another risk: a Federal Reserve that is unwilling to disclose the direction of policy.
The conflict intensified dramatically this week. Fed Chair Kevin Warsh gave no indication during or after his news conference about whether or when the central bank might raise rates in response to continuing price increases. His silence was particularly perplexing because three of the 12 members of the Federal Open Market Committee voted for an immediate rate increase. The committee’s decisions are usually unanimous or passed by a very narrow margin.
Traders were clearly shocked, triggering a frenzy in the final hour of Wednesday’s session. The S&P 500 plunged, suffering its worst selloff on a Fed decision day since December 2024. The yield on the 10-year U.S. Treasury note surged to its highest level since January 2025. The Chicago Board Options Exchange Volatility Index, or VIX, broke above 20, signaling heightened market fear.
“I was frankly shocked by how bad that press conference was,” said Marta Norton, chief investment strategist at Empower.
Wall Street professionals criticized Warsh’s performance harshly. They said the Fed’s previous guidance helped traders align themselves with policymakers’ thinking and therefore reduced market volatility. Investors now want a “higher uncertainty premium” to cover the risk that the central bank will be slow to fight inflation, Karl Schamotta, chief market strategist at Corpay, wrote in a research note. “Some might call it an ‘idiot risk premium,’ but I’m not going to comment on that.”
What exactly was he saying? Analyzing the comments from Warsh’s news conference that confused markets.
“The market is being forced to digest a series of factors that are occurring simultaneously, but the main thread that could be used as an anchor is gone. That used to be the Fed’s forward guidance,” said Joe Gilbert, a portfolio manager at Integrity Asset Management.
Warsh took the opposite approach because he wanted the market to guide the central bank. In his words, investors are “learning to play the game instead of watching the referee.”
Investors said the problem with Warsh’s sports metaphor is that the macroeconomic forces affecting stock prices have become increasingly unstable, making it extremely difficult simply to “play the game.” President Donald Trump is working to rebuild tariff barriers, while the war in Iran has caused sharp swings in oil prices and pushed up inflation expectations. Given the Fed’s role in setting short-term interest rates in response to these and other factors, the market believes that cutting off guidance has further amplified risks in an already highly volatile environment.
“You’re a player on the field too; you’re not just the referee,” Norton said.
The market’s turbulence over the final two days of the week was unmistakable.
After plunging Wednesday afternoon, the S&P 500 rose at times on Thursday and early Friday, then reversed lower, rebounded again and ultimately closed higher.
U.S. stocks have historically tested newly appointed Fed chairs in this way. But Norton said Warsh’s performance on Wednesday was unstable enough to turn the next interest-rate decision and the late-August Jackson Hole symposium into single-day events capable of sending stocks into turmoil. She is far from alone in holding that view.
Investors should “get used to uncertainty,” Stuart Kaiser, head of U.S. equity trading strategy at Citi Global Markets, wrote in a research note on Thursday. “Looking ahead, less guidance from the Fed could mean that this happens more frequently.” Kaiser encouraged investors to use options on the Russell 2000 Index as the best way to trade the uncertainty and volatility generated by future central-bank meetings.