Warsh got everything he wanted without hiking. Equities weakened, credit spreads widened and real rates moved to levels that should slow housing and consumption. @qthomp argues Warsh may be using the long end and balance sheet to tighten financial conditions before resorting to a hike.

Warsh choosing inflation has taken pressure off the Japanese yen, which is up 2.5% today as the dollar exchange rate falls back below 160. If the yen rally continues and the short-term rate differential between the U.S. and Japan narrows, the yen carry trade can unwind quickly.

Warsh's press conference generated more-than-the usual market reaction, and it was as much about what he didn't say than what he did (or what the Fed did): "I don't think it's sustainable, what he's doing, in terms of not saying anything," says Loretta Mester, who spent a decade voting on Fed policy. "I actually want more from my Fed. I want to feel comfortable that the Fed knows what it is doing."

Warsh today clarified that he thinks none of the existing, published measures of inflation that remove price outliers, such as the Dallas Fed trimmed mean, reliably capture underlying price pressures: "None of those are very good measures of underlying inflation.... My view is that we need new measures to understand the underlying changes in inflation. Am I interested in what's the mean or median price of a good and a big box retailer? You bet I am. And none of these measures capture that. I am super interested in finding new measures to do a better job to help us inform our decisions so that the inflation of the last five years don't continue." At his confirmation hearing, he had referred to "trimmed averages" and "median type measures" as possibly more useful gauges of underlying inflation. This led to greater focus on median or trimmed mean gauges from Wall Street analysts who closely monitor inflation and map price data into their analysis of the Fed's reaction function. (In a WSJ story in May that was referenced at the hearing today, I wrote, "Warsh didn’t specify which trimmed mean he had in mind. The most widely cited is the Dallas Fed’s version...")

Warsh refers to the Fed's tools: "Over the coming period I’m going to ask our colleagues and have a good family fight about the extent and timing in which we would need to deploy those to deliver on the promise."