Warsh-led Fed leaves rates on hold and a bond market scratching its head

A divided Federal Reserve left interest rates unchanged on Wednesday even as U.S. central bank chief Kevin Warsh pledged an unwavering commitment to bring inflation down, a message that left markets confused about ​just what he was prepared to do.

Warsh, in what has become characteristic fashion, declined during a press conference to offer any clues about what action would be needed to contain inflation ‌that has held above the Fed's 2% target for more than five years, pledging only: "This Fed will not waver."

Reiterating that promise several times following a split decision by the policy-setting Federal Open Market Committee to leave its benchmark rate in the 3.50%-3.75% range, Warsh for the first time nodded explicitly to the idea that "any central banker" faced with a steady job market and rising underlying inflation would be "more inclined to tighten policy."

Although underlying inflation up until last month had been reaccelerating — driven by rising global fuel and food prices due to the war ​in the Middle East and surging business spending tied to artificial intelligence — Warsh did not offer a rate hike as necessarily the right answer.

"We are on the job, we will deliver, we are focused like ​a laser on making sure we can do it, but the suggestion that we're going to be able to do it with our magic wand is one I ⁠want to disabuse you and everyone else of," Warsh told reporters after a two-day policy meeting. "If inflation continues to be elevated through the forecast period, interest rates could well be part of that solution, but I wouldn't say it's ​in isolation."

The widely expected decision to leave policy on hold drew dissents from three of the 12 FOMC members who wanted a quarter-percentage-point hike instead.

"It's hard to know what to make of Warsh's remarks, which involved a lot of well-turned ​phrases but little in the way of a coherent macro view," Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a note after Warsh's press conference.

Under the Fed's current rules, Warsh's colleagues, including the dissenting chiefs of the Fed's Cleveland, Dallas and Minneapolis regional banks, are free to speak their minds beginning on Friday.