Kevin Warsh’s first major test as Federal Reserve chair arrives this week, and the bond market is making the stakes clear.

The 10-year Treasury yield was hovering near 4.98% this morning, close to the psychologically important 5% level. Meanwhile, inflation remains well above the Fed’s 2% target, and August’s rebound in payroll growth has weakened the case for immediate monetary support.

Warsh now has three choices: raise rates, hold them at 3.50%–3.75%, or cut.

A hike would reinforce the Fed’s commitment to price stability, but put Warsh in direct conflict with President Trump’s demand for lower rates.

A hold could be justified if policymakers believe the latest inflation increase was driven largely by a temporary energy shock. Yet with the 10-year yield nearing 5%, investors are already signaling concern about inflation, federal borrowing and the future path of interest rates.

A cut would be hardest to defend. It might lower short-term yields, but it wouldn’t guarantee lower mortgage rates, business borrowing costs or government financing costs. If investors conclude that the Fed is putting Washington’s preferences ahead of price stability, long-term yields could remain elevated—or climb further.

The decision matters. Warsh’s explanation may matter even more.

His real test isn’t whether rates move by 25 basis points on September 16. It’s whether the Fed’s decision remains anchored to inflation and employment rather than the immediate demands of Washington or Wall Street.

Read my full article, Kevin Warsh’s Hardest Choice Yet, at nedgandevani.nmgfunds.com

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