The Federal Reserve left the Fed Funds rate unchanged in a 3.50%-3.75% range today, as expected. The dot-plot median forecast increased by 1/8 of a point this year and by ¼ point in both ‘27 and ’28. The longer-run median declined from 3.125% to 3.063%. Notably, there are only 18 dots (historically have been 19) in the dot plot, except for 2028, which has just 17, suggesting someone had no 2028 estimate and Kevin Warsh declined to submit any estimates at all. What stood out to markets was that 9 of the 18 officials who submitted a forecast now see a rate hike in the remaining six months of the year, where 8 officials anticipate no change.
The Fed’s latest message was dramatically shortened from prior releases, perhaps a precursor to a new Warsh era of decisively more succinct language and more limited communication from Fed officials. This was roughly the same takeaway from the press conference; Warsh communicated little other than ensuring inflation would be brought back to target and committing to Fed Independence. Warsh did give a shoutout to productivity, and capital investment being important, because investment in GDP growth that boosts the supply side of the economy should lead to lower inflation.
Task Force: A New Chapter for the Fed
Warsh: “I’m appointing a task force on 5 areas central to the broad conduct of monetary policy”:
1. Fed Communications
2. Fed Balance Sheet
3. Use and Reliance on Existing Data Sources
4. Productivity and Jobs
5. Feds Inflation Frameworks (subject to the 2% target NOT changing)
We’d expect more deliverables on the task force by the end of the year. Not a ton of color, but good to see reforms as a top priority for Warsh.
Final Warsh Thoughts
For any naysayer calling Warsh “Trump’s puppet”, I think they were proven wrong in today’s meeting. I feel Warsh proved his independence and stood firm in both bringing inflation lower and reforming parts of the Fed to serve the taxpayer. His statement explicitly stated the Fed will, eventually, “deliver price stability,” which should negate any concerns that he’d be willing to tolerate above-target price pressures indefinitely in the pursuit of a lower rate environment. Overall, I’d give Warsh a solid score today for laying the groundwork for his term as Fed Chair; he stuck with his points and delivered a decently hawkish message to the people.
Market is Getting One-Sided on Next Move Being a Hike
Over the past 30 years, every time that the US two-year yield crossed above the Fed Funds rate, the Fed’s next move was a hike. We are currently in that situation.
Over the last few months, expectations for cuts have been slashed, and transitioned to expectations for rate hikes on the back of a strong economy and high inflation (mostly related to higher energy prices). Right now, about 2 hikes are priced in over the next 10 months. Now that it appears the Iran conflict is behind us, it will be interesting to see how this might change.
So Much For a Steeper Yield Curve
The yield curve has flattened drastically since late January, with a big move on Wednesday following the Fed meeting.
While these moves can be sudden and volatile, a flatter yield curve is not what the market wants to see. This could possibly be the market signaling that 2 rate hikes, in response to supply-side inflation, aren’t what the economy needs.
More to come on this topic.
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