The Federal Reserve and its chairman, Kevin Warsh, closely followed their scenario for interest rates on Wednesday, voting to keep benchmark levels stable, but with a few surprises to keep markets guessing as to how things will play out. The market didn’t like this, and major stock averages plummeted after the meeting and as Warsh said at his press conference.
The five biggest points are:
No rate change, but hawks pivot: There was no clear opposition to keeping the federal funds rate target between 3.5% and 3.75%. But a “dot plot” of forecasts further out showed a trend toward rate hikes later this year. The Federal Open Market Committee was split 9-9 between those who expected rates to remain unchanged or one cut and those who expected at least one rate hike, with the median point indicating a one-quarter percentage point hike. The mystery of the dots has been solved. There was widespread speculation that Mr. Warsh would not submit points in the lead-up to the meeting, but Mr. Warsh confirmed that he would not do so. The Chair has in the past expressed disdain for all such “forward guidance” as hindering future policy. “It is the practice of this committee for participants to submit these projections, and I have encouraged my colleagues to continue to do so. However, I have refrained from presenting any projections that are consistent with my long-held views on SEPs,” he said. Regime Change Through Task Forces: Mr. Warsh has promised to shake up the Fed, and the first step in this has been through the creation of five task forces announced. They are tasked with studying communications, the Fed’s balance sheet, the data sources the Fed relies on, productivity and employment, the impact of artificial intelligence and other transformative technologies, and the central bank’s approach to inflation. Tough on inflation: Mr. Warsh used the phrase “price stability” about a dozen times. For a committee chairman who has often spoken out on interest rate cuts, talk about the committee and its “unequivocal and unanimous” determination to rein in inflation was surprisingly hawkish. The market reacted sensitively to policy. 2 year government bond yield Brevity is the soul of resourcefulness and monetary policy: Warsh also promised to revamp communications, with the first visible step being a heavily condensed post-meeting statement. Prior to the new chairman’s arrival, statements, typically over 300 words long and composed of boilerplate language, were closely parsed by investors. This time: The statement was short at just 130 words, had little ambiguity, and was engaging.
they said so
“Today, we believe the Fed’s FOMC meeting ushered in a new era in U.S. monetary policy.” — Rick Rieder, head of fixed income at BlackRock.
“New Fed Chair George Warsh sounded a bit like the hawkish Fed governors of old in his press conference today, repeating over and over again the need for the Fed to live up to its price stability mandate,” said Krishna Guha, head of central bank strategy and economics at Evercore ISI.
“The[special committee’s]announcement suggests that institutions are actively reviewing themselves rather than in a steady state, and investors should expect the Fed’s operating framework to look very different during Mr. Warsh’s tenure than it did under his predecessor.” — Jason Pride, head of investment strategy at Glenmede.
“Warsh wants his first impression to be that of a ‘reformer.’ We’ll see what that means later this year. As for the policy outlook, the Fed is becoming increasingly difficult to monitor.” — Dario Perkins, Managing Director, Global Macro, TS Lombard.
