Authored by Nohshad Shah, Citadel Securities EMEA Head of Fixed Income,
The Fed sounds hawkish... but markets are testing the reaction functionChair Warsh was unequivocal that there is “no soft inflation target”, that five-plus years of above-target inflation cannot be cured by nine weeks of better data, and that this Fed “will not waver”. Yet despite that language…and three members preferring an immediate hike…the FOMC again declined to move.
Warsh instead repeatedly highlighted the large rise in nominal and real Treasury yields since June, arguing that reduced forward guidance had allowed markets to respond more directly to the data and, in effect, deliver some tightening on the Fed’s behalf.
But all forms of FCI tightening are not equal…higher front-end yields because the Fed has acted to restrain demand are different from a higher long-end driven by investors demanding greater compensation for inflation, term risk, and uncertainty over the reaction function.
Warsh also left markets with some uncertainty over how inflation will ultimately be judged. He confirmed that PCE remains the measure attached to the 2% target under the current framework, but left open whether that will remain the case after the strategy review concludes in January, while invoking Goodhart’s Law, the Lucas critique, and a broader (but unspecified) set of inflation measures. Those are legitimate cautions against relying mechanically on a single statistic.
But investors will still want greater clarity over what the Fed will regard as evidence that inflation has returned to 2%. A fixed numerical target attached to a potentially changing measure risks making the reaction function harder to interpret, particularly while inflation remains materially above target. There may be a strong case for improving the framework, but markets will want reassurance that reform does not amount to changing the measuring stick before success has been achieved.
The initial market response suggests that reassurance has not yet been secured: 30y Treasuries have sold off, breakevens have widened, while equities and the dollar have weakened. Investors may interpret that combination less as a clean tightening in response to stronger growth and more as a challenge to the credibility or clarity of the policy framework.
It is also an uncomfortable outcome in a market already unsettled by rising oil prices amidst the conflict with Iran and the accelerating unwind in AI momentum. The risk from here is a negative feedback loop: higher long-end yields pressure duration equities; equities fall while bonds fail to hedge; correlated losses force further deleveraging and the resulting tightening in financial conditions gives the Fed another reason to wait…which, in turn, encourages investors to demand still more inflation and term premium.
This is the reflexivity at the heart of “market guidance”…the Fed holds because markets have tightened, while markets tighten because the Fed has held.
Markets may be able to deliver part of the required tightening, but they will still look to the Fed to anchor the inflation outlook.
Tyler Durden Tue, 08/04/2026 - 18:30In recent years, few forces in electoral politics have been as potent as an endorsement from Donald Trump. However, the first polls in the special South Carolina primary race for the Senate seat that was held by the late Lindsey Graham shows his sister Darline is in second place, with half of GOP voters saying her Trump endorsement is irrelevant to them. Graham's campaign faces other headwinds, as many South Carolina Republicans aren't enthusiastic about turning one of their Senate seats into an inheritance for someone with a thin political resume.
After Lindsey Graham suddenly died on July 11, South Carolina Gov. Henry McMaster appointed Darline Graham to be a placeholder for the remainder of her brother's term that ends in January. It was seen as a sentimental and politically-safe gesture, with no expectation that she would enter the race for the six-year term that starts on July 11. Then Trump issued a Truth social post, encouraging her to run and saying she'd have his full endorsement. Three days later, Graham told Fox's Sean Hannity "I'm in."
Despite her Trump endorsement, Darline Graham, who's never held an elected office, trails House Rep. Ralph NormanAccording to an Emerson College poll of the crowded race, Graham is starting in second place. She has the support of only 19% of likely GOP primary voters, while US Rep. Ralph Norman leads the way at 22%. A 73-year-old with a background as a real estate developer, Norman has represented South Carolina's 5th District since 2017, and served in the state legislature for 11 years before that. Graham has never held an elected office. Until this summer, she was commissioner of the South Carolina Commission for the Blind, and earlier held a communications role in the South Carolina Vocational Rehabilitation Department.
Two other candidates are in the double-digits: US Rep Russell Fry at 12% and former governor and former House representative Mark Sanford at 11%. Fry, who was reportedly hand-picked by Trump to unseat Republican Tom Rice in 2022, as payback for Rice's vote to impeach Trump over the Jan 6, 2021 Capitol Hill riot. A quarter of likely voters are still making up their minds. The primary is just a week away, on Tuesday, Aug 11, and the top five candidates debated on Monday evening. Unsurprisingly given her lack of experience discussing national issues, some observers said Graham seemed to lean heavily on her notes. Then, in a moment of spontaneity, Graham oddly suggested that constant noise from data centers is somehow a uniquely leftist and maybe imaginary concern:
Darline Graham Nordone’s message to South Carolinians is clear: build more data centers, and if you’re concerned about the constant noise they bring, just get over it. pic.twitter.com/qmJOqBacas
— Kelly McCarty (@KellyLMcCarty) August 4, 2026With no candidate likely to top 50%, expect a run-off of the top two vote-getters on Aug. 25. Assuming Graham makes it to the run-off, our intuition tells us most of those who'd voted for someone other than Graham in the Aug. 11 primary will migrate to the remaining non-Graham option.
The race is a test of Trump's endorsement power, and only 29% of those polled by Emerson say Trump's endorsement makes them more likely to support a given candidate. 53% say a Trump endorsement doesn't affect them one way or the other -- but 18% say Trump's endorsement makes them less likely to support the endorsee. Not surprisingly, Graham's greatest strength comes from the oldest voters: 30% of voters over age 70 back her.
Trump's endorsement has ruffled feathers of Republicans in the Palmetto State, including Dorchester County GOP chair CJ Westfall. Speaking in the context of Trump's endorsee for governor having been clobbered in the June primary, Westfall told CNN:
"The president continues to get bad advice about South Carolina. We certainly empathize with Darline — and even the president, as Lindsey was a really good friend of his — but he’s certainly getting bad advice. We’ve got a lot more exciting options for this seat. It’s a once-in-a-generation opportunity.”
Other members of the GOP machine in South Carolina are likewise irked by Trump's move, with one state legislator calling it a "backroom deal" and another saying "Trump threw us all a curveball with Darline. That wasn’t expected. It wasn’t exactly welcomed here, either."
Importantly, only 4% of Republican special election voters think their senator should focus on foreign policy. That's not good news for Darline Graham, as her brother was only known for his foreign policy exploits that centered on collaborating with the State of Israel to support US interventions in the Middle East, and partnering with Ukraine in America's proxy war with Russia. Reading the winds, Darline Graham has already made a point to say she wants to focus more on domestic issues like the cost of living.
Darline Graham says she’ll be more invested in affordability issues than national security:
“Lindsey was more focused on national security. I know that’s important but I’ll probably be more focused on affordability, what matters to families, the struggling families.” pic.twitter.com/txDfpt6zoy