“Collegial and constructive.”
That’s how Kevin Warsh described this week’s FOMC meeting while regaling reporters on Wednesday afternoon in the US.
A few minutes later, he offered a somewhat different assessment. “I asked for a ‘good family fight’ and I got it,” he joked, referencing his characterization of last month’s proceedings while editorializing around a trio of dissents at this month’s gathering.
The July meeting ended with a split decision to hold rates. Three regional Fed presidents — Beth Hammack, Neel Kashkari and Lorie Logan — all preferred to raise rates by 25bps.
Warsh’s opening statement described the US economy in upbeat terms and inflation as “elevated.” The Fed’s “resolute,” he said. “You’ve heard this before, but we will deliver price stability.”
Over the ensuing half hour, Warsh emphasized two things: The Fed hasn’t adopted an “implicit” inflation target above 2% (i.e., they haven’t given up) and price action in the inter-meeting period demonstrates the utility of jettisoning forward guidance.
On the first point, Warsh delivered a lot of brave-sounding commentary. “This Fed will not waver,” American “prosperity depends” on restoring inflation to target and so on. I don’t believe he’s as committed to that as he claims to be.
Don’t get me wrong. I think Warsh wants to restore inflation to target. I just think that goal will be subordinate to political expediency if and when Donald Trump needs it to be.
Colloquially, anyone who’d take this job at this particular moment in American politics shouldn’t be afforded the benefit of the doubt. I realize that inverts the presumption of innocence, but I’m talking about the court of public opinion here, not an indictment. Only one person’s threatened to formally indict a Fed chair and that’s Warsh’s boss.
As to the second point — about the purported merits of leaving the market to its own devices by eschewing forward guidance — Warsh patted himself on the back for sharply higher nominal and real yields.
As the figure shows, 10-year reals are nearly 30bps higher since Warsh’s FOMC debut, an outcome Warsh said proves markets “are playing the ball not the referee.”
The Fed, he went on, should let “buyers and sellers meet” to determine clearing prices for Treasurys. Policymakers shouldn’t “interfere with the market signal.”
That’s all fine and good except that the “market signal” is plain as day. Have a look:
You’ve seen that chart before. Last week, twos were ~75bps wide to Fed funds. The front-end rallied late Wednesday, but even after retreating meaningfully from the July 23 highs, two year yields remain ~60bps above EFFR.
CNBC’s Steve Liesman cornered Warsh on the point. The markets are talking, the Fed’s supposedly listening, so why were rates left unchanged on Wednesday? Warsh had virtually nothing for Liesman. “Interpreting markets” isn’t an exact science he mused.
A reporter from Axios asked specifically about the twos-EFFR disconnect. Again, Warsh obfuscated. “Markets have made decisions because we stepped back from trying to influence those,” he said, dodging the question.
This gets to what I warned on in my July FOMC preview. A potential point of ironic failure for Warsh’s contention that markets should trade the data rather than the Fed’s expected reaction function occurs when market pricing becomes so disconnected from policy settings that “somebody’s gotta be wrong,” so to speak. At that point, the Fed risks having to conform to market pricing or wrong-foot markets entirely at the risk of stoking undue volatility.
“Is there a point at which you wouldn’t want to surprise markets?” someone from Bloomberg wondered. “Surprise is not what we’re solving for,” Warsh replied. “By not spoon-feeding markets… we’re getting the views from a very accomplished economist, and that’s the internals of financial markets. They’re giving us their own judgment.”
That’s correct. And to reiterate: That judgment currently is that the Fed should hike rates. Warsh was pressed on that at least three times Wednesday and he didn’t have an answer. Not one he could say out loud anyway.
I’m getting that Emperor-is-wearing-no-clothes feeling from Warsh.
Yep. He’s full of it, and although I am saying that from a partisan perspective, I’m not primarily saying it from that angle. He’s not credible. Nothing about his body language, tenor, etc. suggests any sort of real commitment. The opposite I think.
Exactly. Two meetings in and he’s lost credibility.
The optics of the market reaction are very bad: Stocks down, twos rally, long bond bludgeoned. What does that tell you?
Trump’s head may finally explode
At this rate, we might be measuring Kevin’s tenure in Scaramucci’s.
In hindsight, he’s taking a real risk not hiking today: September 16th (the next vote I believe) is a looong way off, and the woods are currently full of lions, and tigers, and bears (oh my!)
WACO – Warsh Always Chickens Out
There’s a Branch Davidian joke buried in here, but I’m not going to make it. Off to watch some Reno 911 instead.
Warsh comes off as a smart Hegseth. Silly sound bites that he thinks people, in this case the market, will appreciate as much as he does.
The one thing we don’t need is an edge lord for a fed chair. Joker. He will learn the hard way.
It should be interesting/amusing to see what “new and improved” inflation index he gins up to provide cover for the POTUS input variable. He can’t really believe that smart/big money will buy it? Or does he?
The credibility issue is falling squarely on Warsh’s shoulders as Chair, but what I don’t understand, if raising rates was clearly the thing to do, is why Powell voted to hold rates steady. Is he just keeping his head down? If the Powell Fed also voted to hold rates steady at this time would he also have faced some blowback?
Well he wasn’t out there making a big show of dropping forward guidance, slashing and burning the statement, talking about throwing the playbook out the window, forming task forces, and just on and on. And yeah, Powell would’ve gotten the same questions on Wednesday as Warsh, and he would’ve done a better job of answering them. I mean, we have to stop ignoring the elephant in the room: This is Donald Trump’s second-term Fed chair. The idea that Warsh got that job without at least suggesting he’ll do what he can to accommodate Trump’s desire for lower rates is wholly laughable. That’s really the context for the credibility issue. I don’t pound the table too much anymore on this because I’m resigned to it, but we live in a soft autocracy in America now.
Question: Who benefits from the steepening yield curve? I’m thinking about carry traders who have become increasingly important buyers of longer paper. Does a steeping hurt existing positions, at least on a mark-to-market basis? Versus does is make the carry trade even more attractive to new money?