Davis: Market overreacted to Warsh; higher volatility ahead (with Yvonne Man, David Ingles)

9/18/2025 2:31:28 PM	short term cautious down	5 days later	+0.19%	-0.10%

Asks if markets are right to price in sooner rate hikes.

Yvonne Man

Nancy Davis

I don't think markets are right. Warsh is trying to build consensus, not signal hikes. He reiterated the 2% target but hinted BLS CPI calculation is out the window and they'll recalculate. By other measures, inflation is under 2% right now.

The market took his comments too literally. He's trying to be balanced, not a sock puppet. Higher vol is coming with less guidance.

Asks if this opens a path beyond 5% for the 10-year yield.

David Ingles

Nancy Davis

He mentioned the balance sheet, which is a huge focus. He resigned from his previous FOMC post in protest of QE2. This could mean steeper curves with normal term premium returning. The opposite happened today with massive flattening because nobody was paying attention to the back end.

Most of the time the difference between 2-year and 10-year is about 100 basis points. We're nowhere near that. It's too quick to jump to say we're hiking in October.

Asks if rate cuts are now out the window.

Yvonne Man

Nancy Davis

Hikes are being priced in, but if the Fed doesn't hike, that would be a steepening of the curve. I don't think hikes are the right way to look at it. In my opinion, they could potentially be cutting rates later in the year.

He doesn't want to come out super dovish in his first meeting while trying to build consensus, especially given all the hawkish Fed speakers before this press conference.

Asks if less guidance and higher volatility is a good thing for market participants.

David Ingles

Nancy Davis

Warsh wants more market-driven prices, not forward guidance driving everything. Forward guidance is what kept interest rate volatility down—it's fallen over 50% in the last three years. That's not normal. A lot of investors are selling optionality to yield enhance credit, which gets people in trouble.

Even though policy rates are not at zero, credit spreads are super tight, so we're back to the yield enhancement selling mantra.

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