Fed Chairman Kevin Warsh has vowed to bring inflation to heel, curbing annual price growth to 2%, in line with the Fed’s longstanding target. But the Fed made little progress toward that goal Wednesday in the minds of many investors.
The Federal Open Market Committee voted 9-3 to leave interest rates unchanged at its July policy meeting. Moreover, Warsh gave no indication at a post-meeting press conference of what might prompt the central bank to raise rates to contain inflation, which has been well above 2% for the past five years.
“Overall, today’s press conference can add to the sneaking suspicion that the Fed will talk tough, but won’t hike and the market conviction over a September rate hike may well come under pressure,” wrote James Knightley, chief international economist at ING.
Stocks rose, then fell, as Warsh answered reporters’ questions, and closed the day sharply lower, with the Dow Industrials shedding more than 1,000 points, or 2.2%, and the S&P 500 losing 1.5%. Long bond yields edged higher, and futures-market odds of no September rate cut rose to 37.6% from 24% the prior day, according to the CME FedWatch tool.
Odds of a quarter-percentage-point hike stand at 62%, up from 55% on Tuesday.
Cleveland Fed President Beth Hammock and Dallas Fed President Lorie Logan dissented from the FOMC’s decision, as expected, in favor of a quarter-point increase in rates, which would lift the fed-funds rate to target range of 3.75%-4.00%. Minneapolis Fed President Neel Kashkari surprised markets by dissenting, as well, in favor of a rate hike.
Warsh used his press conference to reassure the public that the Fed is committed to bringing inflation back down to 2%, and to praise the success of the Fed’s new strategy of eliminating forward guidance, or information about the likely policy path. But if he had hoped the market would continue to read the data rather than messaging from the Fed, Wednesday’s market action proved otherwise.
Warsh insisted that there was nothing “inertial” about the FOMC’s policy and strategy discussions over the past two days. “For some households, businesses, and market professionals, five years of high inflation has left a mistaken impression that’s hard to shake, that the Fed’s implicit inflation target was somehow above 2%,” he said. “Let me reiterate: There is no soft inflation target. There is no soft, implicit target. Not on this committee’s watch. There’s only a target and it’s 2%.”
As expected, the Fed’s postmeeting policy statement contained no forward guidance. The Fed chairman also declined to provide any analysis of the data or scenarios that might prompt the Fed to raise rates, even when grilled by increasingly testy reporters.
Warsh confirmed that the Fed’s official 2% inflation benchmark is tied to the annual growth in the personal consumption expenditures (PCE) price index, which the FOMC voted to reaffirm in January. But he then added that he is also looking at a broader set of inflation data than PCE, while declining to provide details because he didn’t want to fully reveal his “cards.”
The say-nothing stance confused reporters and market analysts who want to know: What is the Fed waiting for? When questioned about the uncertainty that the Warsh Fed has introduced into markets, he cited the difficulty of reform.
“Surprise is not the objective function,” Warsh said. “Surprise is not what we’re solving for. What we’re solving for is how to make the best decisions. Almost everything else should be in service to that goal by not spoon-feeding markets, by not previewing our decisions.”
“Chairman Warsh delivered another evasive press conference characterized by a series of nonanswers to perfectly reasonable questions,” wrote Stephen Douglass, chief economist at NISA Investment Advisors, echoing the mood in the room. “His lack of candor has created an information vacuum in which market participants are left guessing about the Fed’s intentions.”
Yet, Warsh seemed pleased with the recent increase in nominal and real yields across the Treasury curve, attributing the jump to his pullback in forward guidance. “In fact, some of the increases in market interest rates between FOMC meetings are among the most significant in the last two decades,” he said. “Prices reacted in real time to incoming information and the reduction in forward guidance may have been a factor.”
By not previewing the decisions, Warsh said he believes the Fed is getting its views and a judgment of sorts from an accomplished economist—the internals of financial markets. He characterized the change as the markets “learning to play the ball, not the referee.”
Warsh’s comments on yields seemed to signal that he believed markets may have done the work of tightening conditions without the Fed hiking.
“Talking seems to be his greatest talent,” TS Lombard economist Dario Perkins wrote of Warsh’s briefing, characterizing the press conference as 45 minutes of “spin.”
At the least, the torrent of words spun the market into a tizzy, perhaps more so than any spoon could do.
Write to Megan Leonhardt at megan.leonhardt@barrons.com