Yields on government bonds steadied on Thursday, a day after jumping higher, as a chorus of investors and analysts warned that Kevin M. Warsh, the new chairman of the Federal Reserve, had risked the central bank’s credibility with his plans for limiting economic guidance.
The yield on the 10-year Treasury note, which underpins the cost of borrowing from mortgages to business loans, inched lower on Thursday but remained close to its highest level since President Trump returned to the White House. The yield on the 30-year Treasury bond also held steady after hitting its highest level since 2007 on Wednesday.
Mr. Warsh has said that he and his fellow policymakers can gain better insight into what investors really think about the economic outlook if financial markets remain “unfiltered,” meaning they have not first passed through the filter of the Fed’s guidance about how it sees the economy going forward.
But experts said that financial markets would still reflect what investors expected the Fed to do, just with less clarity.
That uncertainty means bond investors are likely to demand higher yields to protect against the risk of losing money if interest rates end up being higher than expected. Higher yields means higher borrowing costs for everyone from the government to companies to consumers. At its worst, it could accelerate concerns about a looming fiscal calamity.
Those worries were visible in financial markets after the Fed’s decision on Wednesday to keep steady the short-dated interest rates it controls, despite inflation remaining stubbornly high.
Three policymakers dissented from the decision, voting to raise rates. During a news conference after the decision, Mr. Warsh declined repeated questions from reporters on how the Fed will tackle inflation, saying only that he was serious about doing so.
Yields on long-term Treasury bonds rose sharply in response.
Alan McKnight, chief investment officer at Regions Bank, said that in the absence of clearer guidance from Mr. Warsh, the move in Treasuries was “a statement about the lack of conviction by the markets that the Fed is going to be willing, and or able, to get inflation down.”
Investors and economists spend a lot of time thinking about what the Fed is likely to do, because its actions can have implications across the globe on a wide range of decisions, from whether a stock is worth buying to the cost of oil is in Egypt.
The clearest reflection of what investors think the Fed will do comes from the government bond market.
The yields on government bonds, in simple terms, represent three things: expectations for how the Fed will alter interest rates over time, the outlook for growth and inflation and the risk of lending to the government.
Mr. Warsh said Wednesday that, despite the desire for forecasts and commentary from Fed policymakers, “we need to observe market reaction to developments direct and unfiltered.”
But expectations about growth and inflation are deeply intertwined with the market’s views on what the Fed will do as well, analysts said, whether or not the Fed provides public guidance.
“I don’t see a scenario where the market isn’t trying to price based on what it expects the Fed to do,” said Blair Shwedo, a managing director at U.S. Bank.
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