FOMC Watch – Half the board sees rate hikes, Warsh gives no guidance

The hawkishness of that last statement was further supported by the projections. Nine out of eighteen FOMC participants pencilled in a rate hike in the dot plot. The new Fed Chair Warsh refrained from putting in a dot. We see wide divergence, with views ranging from one to three hikes, and only a single still seeing an easing. This is a stronger hawkish shift then we, and most others, had anticipated. At the same time, the dots for end of next year moved substantially less. The remainder of the projections was as expected, with substantially higher inflation in 2026 and a slight slowdown in growth.

In his opening statement, he did mention both mandates, noting both price stability and maximum employment when talking about taking up his new role. Still, his remarks on inflation were strong; he noted inflation had been high for more than five years, but that need not continue. “The FOMC is unambiguous and unanimous for price stability.” He explained the removal of half the statement by the FOMC agreeing that the forward guidance is not well suited to the current policy at this juncture.

In the second part of the opening statement. He announced the appointment of five taskforces on the following topics: 1) Fed communications, 2) the Fed’s balance sheet, 3) use and reliance on existing data sources, 4) productivity and jobs, and 5) the fed’s inflation frameworks. These are independent and external task forces, that need to investigate whether the Fed’s functioning should change in these areas.

The first appears to be a means to reduce the amount of communication. The second task force is somewhat at odds with the press statement, being tasked with investigating whether the ample reserves framework is the right one. On the third, he noted for instance that NFPs were only useful after the third revision, and that he’s open to new and alternative data sources to get better real-time signals. The fourth effectively builds way for his AI narrative, and the fifth investigates how to measure inflation (e.g. whether his preferred trimmed mean measure might be more appropriate), but does not question the 2.0% target, at least not before it is definitively reached. So while we do not necessarily see immediate action on the topics we raised before, he is certainly making a strong start with the process. He expects the taskforces to present their findings by year-end.

The Q&A was decidedly less informative than Powell’s used to be. Ultimately, Warsh’s answers broadly fell into two categories; read the press statement, or, if it’s not in there, ‘there’s a taskforce for that.’ There were still a number of topics he did expand on, all related to the major pillars of his policy intent: the conviction of higher AI productivity, potentially allowing for lower rates, shrinking the balance sheet, and reducing communication.

When asked about the current stance, he described it as uneven. It’s restrictive for housing, but when he looks at markets, or anywhere else, it seems hard to believe that it’s restrictive. This mention of restrictiveness is a departure from Powell’s recent communication, which stated that the FOMC thought they were broadly neutral. He suggested that this may be because of a different policy transmission mechanism between the policy rate and balance sheet operations, suggesting, without saying, that QE is inflating asset prices. Of course, there’s a task force for that.

When asked about the impact of AI, he broadly described his productivity conviction. Indeed, his final words in the entire press conference were; ‘strong productivity growth is not something we fear, but something we embrace.’ Of course, there’s a task force for that.

When asked whether there would be press conferences every meeting, he noted that he was here today because he had important things to say. The various frameworks, and the strong and the FOMC’s unambiguous support for price stability. He expected that he would have more interesting announcements in the coming meetings. He reflected on the Fed’s interaction with financial markets. He sees them as the most important source of information for central banks, but worries that their signal is noisy because of second order effects; they don’t interpret data, they interpret how they think the Fed will react to it. Less communication could change those dynamics and increase price discovery in markets. Of course, there’s a task force for that.

Overall, the policy statement was relatively hawkish, and his strong emphasis on the price stability mandate was hawkish as well. Still, every time he veered slightly off the press release’s script, we saw some dovishness come out. It was clear the Fed needed to make a hawkish statement today, it is not clear that Warsh champions it.

Our Fed view remains that the FOMC will be ready to cut rates again at the end of this year. It’s natural that market pricing has shifted to a more hawkish outlook on the back of the recent data flow. The Fed seems in no rush to raise rates. Our models suggest that peak inflation was reached last month, even before the Iran-US truce, and we expect the labour market to deteriorate again at the end of the year. This will provide grounds for gradual downward rate adjustments; the single 25bps cut at the end of this year, and two more next year. We remain tentative to the emergence of second round effects in inflation.