The market no longer trusts "verbal anti-inflation" rhetoric, and U.S. Treasuries are forcing the Fed to show its hand. Analysts offer two scenarios: first, the committee collectively pushes for a rate hike, with Fed Chair Kevin Warsh echoing the move; second, Warsh temporarily holds steady using his influence, but rate hikes may still be needed in the future.

The U.S. Treasury market is sending a clear signal to Fed Chair Kevin Warsh: tough talk alone to combat inflation may not be enough to stabilize market expectations.

Since July, the conflict between the U.S. and Iran has escalated again, pushing international oil prices briefly above $100 per barrel and triggering a new round of selling in the U.S. Treasury market. The yield on the 10-year Treasury note, a core pricing benchmark for global financial markets, has risen by more than 30 basis points since the end of June, climbing to 4.678% as of last Friday, near a decade-high. Bond prices move inversely to yields, and rising yields indicate that the market is demanding higher risk compensation.

"The market is sending a message to the Fed that uncertainty is building, and investors want more compensation," said Paul Christopher, Head of Global Investment Strategy at Wells Fargo Investment Institute.

The core concern for the market is that rising oil prices could reignite inflation, while the Fed under Warsh is reducing clear guidance on its future policy path. Compared to former Chair Jerome Powell's era, where forward guidance stabilized market expectations, Warsh leans more toward letting economic data determine policy direction.

As of last Friday, CME Group's FedWatch data showed a roughly 62% probability that the Fed will hold rates steady at its July meeting, but the probability of a rate hike has risen to 38%, significantly higher than about 13% a week earlier.

"This shows the market is very worried about inflation, and it's watching to see if the Fed will use concrete actions to prove its anti-inflation stance," said Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities.

With just four days left until the Fed's rate decision meeting, market judgment on the central bank's next move has fallen into a state of uncertainty rarely seen in years. This "uncertainty" precisely reflects the policy shift driven by new Fed Chair Kevin Warsh.

"We're seeing the new chair's imprint in market prices," said Narayana Kocherlakota, former President of the Minneapolis Fed and now an economics professor at the University of Rochester.

He believes Warsh wants to establish a new Fed model: the market no longer knows in advance what the central bank will do, and the Fed can freely choose to hold rates steady or hike based on the latest data. This has also led the market to focus more on the stances of different Fed officials.

Jim Bianco, President and Chief Macro Strategist at Bianco Research, said investors now need to watch the attitudes of the Fed's 12 voting members, rather than relying solely on the chair's voice. "Warsh is no longer the sole driver; the Fed has 12 independent voters, and the chair is just one of them," Bianco said.

Hawk-Dove Divide Widens

Some Fed officials have clearly expressed a desire for further tightening. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have stressed for months that the Fed needs to consider rate hikes to ensure inflation continues to decline.

But other officials believe the Fed can wait for more data. New York Fed President John Williams argues that policymakers can observe future inflation changes before deciding whether to adjust rates.

"Observing the Fed has now become a vote-counting exercise, where you need to know the stance of each voter," Bianco said.

He believes that currently, about five votes within the Fed support a rate hike, still short of the seven-vote majority needed.

However, Neil Dutta, Head of Economic Research at Renaissance Macro Research, said that while pro-hike officials are not a majority, they are "very firm in their stance," and they could push some wavering members to join the tightening camp.

Derek Tang, co-founder of LH Meyer/Monetary Policy Analytics, said this meeting could mark the first clear split within the Fed under Warsh. The June meeting chaired by Warsh saw no dissenting votes, partly because other officials gave the new chair a "honeymoon period," but this may not last.

Whether Warsh Supports a Rate Hike Remains the Biggest Question

The biggest question now is what Warsh himself thinks about the rate path. Since becoming Fed chair, Warsh has not clearly revealed his judgment on the economy, inflation, and interest rate trajectory.

Gregory Daco, Chief Economist at EY-Parthenon, said Warsh's testimony before Congress was "at best ambiguous," failing to clearly state whether he believes inflation will continue to decline or whether AI investment could create inflationary pressures.

"These are questions a Fed chair should answer, but Warsh seems to rely to some extent on the committee's collective decision-making," Daco said.

Bianco believes that if Warsh ultimately supports a rate hike, the Fed's rate-setting committee vote could be 10 to 2.

But Dutta thinks Warsh could push the committee to hold rates steady in July. However, from a strategic perspective, if pressure within the committee forces a rate hike in the coming months, Warsh might prefer to act early.

Meanwhile, some economists argue Warsh is not inclined to hike rates immediately. They note that Warsh showed a preference for rate cuts during his earlier campaign for the Fed chair role, and the U.S. government has consistently pressured for lower rates.

President Donald Trump acknowledged in a recent interview that the Fed chair is just one vote on the committee. "I have great respect for him, but don't forget, he has a committee," Trump said.

Tim Duy, Chief U.S. Economist at SGH Macro Advisors, believes this remark effectively weakens Warsh's influence as chair, as the market will focus more on the internal balance of power within the committee.

Warsh Needs to Win Committee Support

Another challenge for Warsh is that he does not automatically have the backing of other Fed officials.

Kocherlakota said that historically, Fed chairs can usually coordinate the committee to form a consensus, but this doesn't mean other members unconditionally support the chair.

"A Fed chair doesn't automatically get seven votes just by sitting in the position; he has to convince his colleagues that a certain policy is in the economic interest," he said.

Kocherlakota, who served alongside Warsh as a Fed official from 2009 to 2010, said Warsh has excellent analytical skills but needs to translate his personal judgments into policy arguments that can influence the committee.

Currently, former Fed Chair Jerome Powell remains on the Fed Board of Governors, adding to the uncertainty in policy discussions.

Bianco said that if there is a serious split within the Fed, Powell could become a key swing voter.

Kocherlakota believes that given recent inflation data has cooled, the Fed still has reason to hold rates steady in July. However, over the next two to three meetings, the Fed may still need to hike rates to maintain its anti-inflation credibility and policy independence.

For Warsh, the real challenge is coming: how to build enough influence to guide a deeply divided Fed toward the next policy path while reducing market guidance.