The message from the bond market is unmistakable: despite Kevin Walsh's repeated hawkish pledges to curb inflation, the Federal Reserve Chair appears reluctant to deploy the central bank's interest rate tools to achieve that goal. After the Fed held rates steady for a seventh consecutive month, investors dumped 30-year US Treasuries, sending yields soaring 14 basis points to near 5.23%, the highest in 19 years.

Market-based inflation expectations rose, the dollar weakened, and even equities fell as investors bet that Walsh is merely delaying an inevitable rate hike. The market moves reflect growing concern that Walsh may struggle to successfully contain inflation, which has remained above the Fed's target for five consecutive years. As a result, bondholders have pushed down yields on the shortest-dated Treasuries, signaling they are rapidly lowering expectations for near-term rate increases, while demanding higher compensation for holding longer-dated bonds to offset inflation risks over the coming years. The 2-year US Treasury yield declined while the 30-year yield rose, causing the yield curve to steepen by one of the largest margins after a Fed policy meeting since at least the mid-1990s.

Ben Emons, Managing Director of Fixed Income at Highline Asset Management and founder of FedWatch Advisors, said the yield curve steepening indicates that Walsh's policy strategy lacks credibility. Emons noted that the approach of talking tough without acting effectively throws the ball to the market, letting it self-judge and effectively tighten policy on the Fed's behalf. However, he pointed out that if inflation accelerates, the market may again view the Fed as behind the curve, which could backfire.

The Fed's decision to keep its benchmark rate at 3.5% to 3.75%—unchanged since the central bank last cut rates in December, just over two months after Walsh was appointed by President Donald Trump—has raised concerns. Trump has downplayed the inflation issue and repeatedly criticized Walsh's predecessor, Jerome Powell, for not cutting rates more aggressively. This has fueled worries about the Fed's ability to maintain its political independence, a key pillar of its credibility.

Since chairing his first meeting last month, Walsh has repeatedly emphasized that the Fed will take all necessary steps to bring inflation back to its 2% target. Still, in what Walsh described as a "still-strong economy," the Fed has maintained a wait-and-see stance. When pressed by reporters at a press conference about why the Fed hasn't raised rates despite consumer price inflation of 3.5%, Walsh argued that rising long-term market rates have already done some of the tightening work for the Fed.

Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, said he couldn't recall a press conference where everyone said they didn't understand and asked the chair to be clearer. The market's reaction was the same. He noted that the sharp rise in long-term yields reflects a lack of confidence, adding that the long-dated bond market does not believe Walsh's anti-inflation narrative. Walsh's remarks led traders to push expectations for a potential Fed rate hike to later this year. The 2-year Treasury yield fell as traders rely on upcoming inflation and employment data to gauge the Fed's policy path.

Equities fell, with the S&P 500 closing down 1.5%, as investors bet the Fed will face increasing pressure to act. This was also reflected in the policy decision, with three officials dissenting and voting for an immediate rate hike. Kevin Flanagan, Head of Investment Strategy at WisdomTree, said these dissenting votes signal that internal divisions at the Fed are beginning to surface.

In the days leading up to the meeting, Wall Street was increasingly expecting a rate hike, with traders raising the probability of a move to as high as 40%, reflecting a rare lack of consensus on the eve of the decision. This uncertainty may persist as Walsh moves away from the long-standing practice of his predecessors to signal policy direction, fearing that doing so would constrain policymakers. Cindy Beaulieu, Chief Investment Officer for North America at Conning, noted that Walsh has also refused to reveal what he might say at the Jackson Hole symposium in late August, a key venue for central bankers to signal policy. She said Walsh described his speech as still a blank page, and his deliberate lack of clues makes it harder to judge whether the Fed is truly ready to raise rates.