WilliamBlair Economics Weekly

Equity Research Macroeconomics

Economics Weekly Louis Mukama Let the Market Decide

Please refer to important disclosures on pages 13 and 14. Analyst certification is on page 13.

One of the key points that came out of last week’s FOMC service to that goal. By not spoon-feeding mar- meeting was that Fed Chair Kevin Warsh wants the bond kets, by not previewing our decisions, by not market to do more of the heavy lifting with regard to sort of giving nudges and leans, my colleagues fighting inflation and promoting economic growth. He and I have found in the intermeeting period feels that the market in recent decades has been molly­ what we’re getting is the views from a very coddled by the Fed and it is high time for greater price accomplished economist. That’s the internals discovery. In this Economics Weekly we discuss why of financial markets. Instead of just repeating or that view is sensible in this new inflation regime, but echoing what we’re saying back to us, they’re giv- why greater price discovery is also a euphemism for ing us somewhat, not perfect, their own judgment. increased market volatility. So, surprises are not the objective. [Emphasis added]

Exhibits 1 and 2 show what happened to the 10-year T- What Warsh Said note yield and the yield curve in the intermeeting period to which Chair Warsh is alluding. Warsh’s opening remarks at the press conference for the July 28-29 FOMC meeting included: Exhibit 1 10 Year T-Note Yield & FOMC Meetings, % Two economic developments are worth highlight- 4.8 Warsh's First Warsh's Second 1

ing. The first is a very notable change since our FOMC Meeting FOMC Meeting 0.9

last meeting 42 days ago: nominal and real yields 4.7 0.8

are materially higher across the Treasury curve. 4.6 0.7

In fact, some of the increases in market interest 0.6

rates between FOMC meetings are among the most 4.5 0.5

significant in the last two decades, ranking around 4.4 Price Discovery 0.4

But if the Committee didn’t change its policy 10 Year T-Note Yield 0.1

rate, what happened? In the intermeeting period, 4.2 0 31-Mar-26 14-Apr-26 28-Apr-26 12-May-26 26-May-26 9-Jun-26 23-Jun-26 7-Jul-26 21-Jul-26 4-Aug-26 18-Aug-26

market attention centered on real data and real Sources: Bloomberg, William Blair Equity Research

economic developments. Prices reacted in real time to incoming information, and the reduction in Exhibit 2 forward guidance may have been a factor. Market Yield Curve participants are learning to play the ball, not 0.60 10 Year - 2 Year T-Note Yields 1

the referee—and market prices will continue Warsh's First FOMC Meeting Warsh's Second FOMC Meeting 0.9

to respond in the direction and magnitude they 0.55

see fit. This is, in my view, a change for the bet- 0.50 0.7

ter—and we are just getting started. After all, 0.45 0.6

the central bank need not always and everywhere 0.40 0.5

be the center of attention. I understand the desire 0.35 0.4

for rolling forecasts and commentary from this 0.3

Committee. But for our part, we need to observe 0.30 0.2

market reaction to developments, direct and un- 0.25 Price Discovery 0.1

filtered. I want to stress, of course, that decisions 0.20 31-Mar-26 14-Apr-26 28-Apr-26 12-May-26 26-May-26 9-Jun-26 23-Jun-26 7-Jul-26 21-Jul-26 4-Aug-26 18-Aug-26 0

by this Committee matter a great deal. And where Sources: Bloomberg, William Blair Equity Research

necessary and appropriate, we will not hesitate to act. [Emphasis added] Longer-term yields rose, and by much more than shorter- Later, in a response to question from Jonnelle Marte term yields, with the curve re-steepened. Chair Warsh from Bloomberg, Warsh also remarked: seems delighted with this result, ostensibly because it means the Fed has less work to do if financial conditions Surprise is not the objective function. Surprise is are tightening on their own accord. not what we’re solving for. We have a clear North Star. What we’re solving for is how to make the best decisions. Almost everything else should be in