Corporate executives are voicing concerns over Federal Reserve Governor Kevin Warsh's recent decisions regarding short-term interest rates, fearing a negative impact on economic expansion. Following Warsh's second Federal Reserve meeting without an interest rate hike, chief executive officers interviewed by On The Money indicated their primary worry is not necessarily inflation itself, but the trajectory of the yield curve.
The Federal Funds rate, currently targeted between 3.50% and 3.75%, directly influences short-term rates but has less impact on the longer-term rates crucial for economic activity. Business leaders are particularly focused on yields for 10-year and 30-year Treasury bonds, which dictate borrowing costs for business expansion and consumer loans such as mortgages and credit cards. These longer-term rates have been rising, with the 30-year bond exceeding 5% and the 10-year bond approaching that level.
One significant factor contributing to this rise is the substantial demand for capital driven by the buildout of artificial intelligence. This "insane" demand, as described by one CEO, is pressuring long-term rates higher. Executives believe that a modest increase in the Federal Funds rate by Warsh could signal his commitment to combating inflation and potentially help temper the rise in long-term yields.
Warsh, known for his hawkish stance on inflation dating back to his time as a Fed governor and later as an investor and academic, has accurately predicted inflationary spikes in the past. However, his current approach appears to be a delicate balancing act. Sources suggest Warsh may be hesitant to engage in direct conflict with President Trump, who has historically focused intently on the Federal Funds rate and has previously expressed a desire for personnel changes at the Fed.
Treasury Secretary Scott Bessent has reportedly advocated for a greater focus on the 10-year bond rates, but without success in swaying the President. The current economic climate, with rising long-term yields potentially impacting AI-related borrowing, may force a shift in policy. Corporate leaders are watching closely to see if and when the Federal Reserve, under Warsh's influence, will adjust its strategy to address concerns about long-term rates and sustained economic growth.