The new Federal Reserve Chair, Warsh, is facing a policy choice: whether to raise interest rates to suppress long-term rates in an effort to lower borrowing costs for the real economy, such as mortgage rates. This strategy resembles the historical “Greenspan Dilemma,” in which central bank rate hikes actually led to a decline in long-term yields. Currently, the bond market has priced in a 38% probability of a Fed rate hike this week.

Since taking office in May, Warsh has consistently taken a hawkish stance, emphasizing the Fed’s independence and prioritizing price stability, as inflation has remained above the 2% target for 63 consecutive months. Market analysts believe that a rate hike would strengthen Warsh’s credibility in the fight against inflation, thereby squeezing out the inflation premium embedded in long-term interest rates. Following Warsh’s recent hawkish remarks, the yield on the 10-year U.S. Treasury note fell in response, reenacting a miniature version of the “Greenspan Paradox.”