Markets were left to their own devices for the first time in a generation after Warsh scuttled forward guidance as part of his Regime Change.
By Wolf Richter for WOLF STREET.
The FOMC kept its five policy rates unchanged in the range of 3.50% to 3.75% after “a good family fight,” as Warsh has called the process repeatedly since becoming Chair.
Some of the disagreements spilled out into the open with 3 dissenters – Beth Hammack, Neel Kashkari, and Lorie Logan – who preferred a rate hike. Let there be dissents; they’re a breath of fresh air.
With Warsh staying away from anything even remotely smelling of forward guidance, there was unusual uncertainty in the markets about the outcome of this FOMC meeting.
The CME FedWatch Tool, which tracks the Federal Funds Futures market, assigned a 33.7% chance of a rate hike and a 66.3% chance of a hold still hours before the release of the FOMC statement.
In the Treasury market – left to its own devices without forward guidance – the 2-month Treasury yield spiked last week, indicating that investors in that maturity started penciling in a rate hike at this meeting. These securities mature at around the time of the FOMC’s September meeting, and so that portion of the bond market doesn’t care about a September rate hike, but these buyers wanted to be paid for a rate hike they expected at this meeting.
Upon the release of the FOMC statement today, the 2-month Treasury yield instantly plunged by 7 basis points.
The FOMC statement was terse and devoid of forward guidance, at 166 words, not counting the contact info and links, compared to the 341 words of the last statement under Powell. A terse statement devoid of forward guidance was one of the first acts of Warsh’s “Regime Change” at the last meeting.
The statement was primarily worried about inflation, and less worried about the economy and labor market. That shift had started in March under Powell.
There was only one change beyond of the number of votes and listing the dissenters:
New: “The Committee is continuing its policy of maintaining ample reserves in the banking system.”
Old: “The Committee reaffirmed its policy of maintaining ample reserves in the banking system.”
This was a no-dot-plot meeting. In past years, the FOMC released a “Summary of Economic Projections” (SEP) quarterly, after 4 of the 8 FOMC meetings a year. The SEP includes the “dot plot” that indicates how each FOMC member sees the development of future policy rates, inflation, GDP growth, and unemployment.
The June meeting had been a dot-plot meeting, but Warsh, having declared war on forward guidance, didn’t submit his projections to avoid giving forward guidance, and thereby began torpedoing the dot plot. And there may be no more dot plots in the future. But if the FOMC releases another SEP, it will be after the September meeting.
The whole statement:
The Federal Open Market Committee approved the following statement for release by a 9 – 3 vote:
The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.
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This really isn’t a totally surprising result. The interest lies in the “exposing” the voters in dissent. This may be foretelling of pressure being applied to committee members to actually approve a hike in September. This also gives Trump until next meeting to end the Iran conflict, get energy prices under control. If not done, a hike is most likely.
Candyman –
“This also gives Trump until next meeting to end the Iran conflict, get energy prices under control”
Your assumption is that he has control. I’d argue that he lost control but that is a separate topic for another day. Cheers!
Not really August is Jackson Hole and he needs to deliver his “vision” speech then. I guess he can do the “WarshWaffle” again in August to defer to September lol
Listening to Q&A period now. So the FED is going to let the market direct rates – what could be the consequence of that if the market takes the 10Y to 5%+?
Kashkari being one of the dissenters was interesting.
So by Warsh not dissenting suggests he doesn’t really want to do anything if possible.
I’ve put in a purchase order for a ten year note at the August auction and am very happy to get near 5% or better on that money for the next decade. By November if the Fed doesn’t get ahead of it maybe 5.5%?
A Chair cannot dissent. His job is to build a majority. If he dissents, he is finished as Chair.
The Fed & congress have driven CPI to over 2% for the past 5 years. CPI is now at 4.2%.
Americans can’t afford groceries or rent. The Fed doesn’t care about raging inflation. All the Fed cares about is the stock market.
My imagination is limited, so I don’t see a benefit to any of this.
I see not one adult at the table in D.C.
No increase, not surprised, bankstreet wins.
Wall Street breathes a sigh of relief as the Federal Reserve holds rates steady
The Federal Reserve held its key interest rate steady as the US central bank concluded its two-day July policy meeting.
“Wall Street breathes a sigh of relief”
Just one sigh of relief. Then back to red. Right now: S&P -0.8%, Dow -1.7%, Nasdaq -0.7%. 10-year yield +5 basis points to 4.66%.
Your title says volumes – “….after Enormous Uncertainty in the Markets.”. There is indeed massive uncertainty in the markets, especially housing, and the Fed knows that an interest rates hike will tank the already sick housing market into depression territory. The housing market is maintaining the illusion of ‘everything is A-ok’. We are living in interesting times.
Read the article, not just the headline. This was about markets pricing in the chance of a rate hike…. since this is a Fed article, not a housing article.
As we speak, the 10-year Treasury yield is up 5 basis points, which pushes up mortgage rates
Interesting the comments on CapEx spending I thought as truly not a bad thing but it does have to materialize as needed and in the correct areas. That won’t be answers we have in the short run however although some worrying signs in AI sector.
Bad News; New Federal Reserve “boss” same as the old boss and will keep inflation raging.
Good News: New Federal Reserve is going to limit their communication so at least we won’t be “gaslighted” about all the Federal Reserve’s “tools” and the public can clearly see they (FOMC) are “tools” themselves.
Neutral News: Corporate press can keep spouting nonsense about the FOMC like it is some kind of caged wrestling match.
Neutral News: Thousands of years of human regimes inflating prices with debased or paper currency to fund oligarch decadence and maintain bloated empires will continue with all enablers already on the “ash heap of history;” where in the near future a completely discredited Federal Reserve will be studied in children’s history books.
If FED was really serious about taming inflation, they’d have at least done a symbolic hike of 25bps.
FED has enabled gov for profligate spending and I don’t see it stopping.
The only game in the town is :: Inflating away the debt via Inflation.
I hereby coin the phrase “The Warsh Waffle” … there will be no hikes next year till expectations are 100% LOL
“whitewarshing” inflation
Wolf, could you kindly share your BTL opinion abour Warsh’s intentions?
Do you think he is “looking through” inflation that was on the rise even before the unpredictable and hopefully transitory Hormuz woes?
Can the bond market end up regulating the economy even if the Fed stays dovish?
“The Committee will deliver price stability.”
How, exactly and when are they supposed to do that? Doesn’t it look like they are actually content with a moderately elevated inflation rate?
Thanks in advance
Not surprising.
I guess it’s time to invest as if we are going to be running around 4% + inflation, likely much higher, for years and years going forward. What works in that environment? Maybe stocks are cheap given where inflation is going.
At some point if you can’t beat inflation, you have to embrace it.