The Federal Open Market Committee (FOMC) elected to hold the target interest rate (Fed Funds rate) range at 3.25%-3.75%. This action was only a surprise to market traders who chose to raise the odds of a target rate hike at this meeting when the US renewed its bombing of Iran, causing oil prices to spike. Nevertheless, three dissenting opinions were duly noted in the press release, along with the basis for their dissent being a desire to raise the target rate by a quarter of a point: Neel Kashkari, Beth Hammack and Lorie Logan. Governor Chris Waller, who has recently been indicating his concern over inflationary pressures and the possible need for the Fed to take action, was not one of the dissenters. It is probable that markets will read these dissents as a sign of mounting pressure on the Fed to raise rates as early as the next meeting in September. If inflation has not notably cooled, and/or if the conflict in the Persian conflict has not substantially de-escalated — both increasingly unlikely as of this writing— it will be difficult for the Federal Reserve to avoid taking action.
Note: The press release for the above-referenced announcement included a somewhat unusual attachment detailing the specific operational details given to the Open Market Desk by the FOMC for the purpose of maintaining the target rate in the 3.25%-3.75% range. The FOMC/Fed controls interest rates through so-called “open market actions” involving the buying and selling of Treasury holdings. This is straight out of any Econ 101 textbook discussion of how monetary policy is conducted. It appears that this attachment may have been included to give substance to the extremely short, curt press release (in keeping with the new Warsh-style method of communicating without providing forward guidance). However, it is possible that one item in this attachment signals a continuing restructuring of the Federal Reserve balance sheet, indicating that principal payments on existing Treasury securities should be reinvested in shorter-term (less than 1 year) Treasury bills.
The press conference contained an unexpectedly large amount of content, given Chairman Warsh’s aversion to both “forward guidance” as well as specific insight into his personal thinking on economic matters. Although seemingly more at ease with the reporter pool than he was at his first press conference, his reliance on paternalistic catch phrases — “the Fed is on the job”, “good family fight”, “new chapter at the Fed’ — was not well-received. Similarly, there was an abundance of platitudes about the impressive thoughtfulness of the members of the Federal Reserve Board and their “dedication to examining the hard questions.” Near the end of the press conference, one statement (quasi-question) probably summed up the overall market response to the press conference and seemed to annoy Warsh immensely: “All I hear you talking about is what you have been talking about with respect to inflation, not about inflation itself” which prompted Chairman Warsh’s non-sequitur reply that “Believe it or not, I did other things today than just this press conference.” In a more measured moment, Chairman Warsh said that what he hears is a great deal of impatience on inflation from businesses and households, leading perhaps to some intolerance for the methodical approach he wants to take in determining the best course of action. This comment has interesting implications for the use of tariffs, which may make inflation higher or more stubborn than what households and businesses want to see immediately.
In terms of substance, several interesting and important points were made which should be much-contemplated by analysts:
- Chairman Warsh will continue to do press conferences after FOMC interest rate decisions. This was a considerable surprise.
- The Fed has “no tolerance for inflation,” and the target is 2%, period. The data used to measure inflation will continue to be the measure laid out in the annual Fed strategy document published in January: the Personal Consumption Expenditures (PCE) deflator. Chairman Warsh “will stand by that strategy document,” but the next strategy document in January 2027 may offer up a different or amended measure.
- Chairman Warsh has not decided what to say at the upcoming Kansas City Federal Reserve Conference in Jackson Hole. He would prefer to use his remarks to talk about big, visionary issues such as demographics or productivity growth, but he may opt for a more traditional speech that provides a “set-up for all the things that will happen between September and December.” Apparently the last quarter of the year will be eventful.
- It is Chairman Warsh’s belief that a great many people had developed a “mistaken impression” that the Fed target inflation rate was not really 2%. It’s a perception that seems to be hard to shake, but he is determined to correct this impression. This appeared to be an unnecessary and not well-founded swipe at his predecessor. Nevertheless, it served to emphasize that getting inflation to 2% is currently his one and only measure of personal success.
- Chairman Warsh is strongly committed to the Fed’s dual mandate, accepting that price stability and full employment are mutually obtainable, “in contrast to many who in the past believed there was a necessary trade-off.” One has to go back to pre-Alan Greenspan days to find the Phillips Curve adherents to which he is referring.
- In a very short time, the avoidance of forward guidance “appears to be working”. In this interpretation, “market signals” are now purer and provide the Fed with better information. However, when asked what the Fed is hearing from the markets, now that the markets are providing clearer, less compromised signals, Chairman Warsh initially did not have an answer he wished to make public. Although the bond markets would seem to be signaling that the Fed should raise rates, Chairman Warsh rejected that characterization, choosing to interpret recent increases in bond yields as “a statement about the strength of the economy.”
- Capital spending is extremely strong, with as much as 20% growth in technology and software investment. It was noted that this should be viewed as an investment in the future, but the timing for the return on that investment is uncertain. This seemed to indicate that the near-term inflationary effects from large amounts of AI spending are something that was a significant topic during these two days of meetings. Unusually, Chairman Warsh devoted very little time to discussing productivity growth.
- There are four “big questions” for Fed policymakers: What is really happening? What are our tools? What are the effects on the economy? How do we achieve price stability in an environment of continual shocks? This is a “period of watchful thinking, not watchful waiting”.
- Interest rates are not the proper sole focus of attention. “Monetary policy matters by how it affects the real economy”, which sounds like a return to the ancient academic concept of MV=PQ. There was a time when Fed watchers focused first and foremost on the money supply, believing that interest rate manipulation was a misguided effort to fine-tune economic growth. Chairman Warsh has explicitly rejected the fine-tuning concept.
- The unexpected deceleration of inflation in June was a non-factor in this FOMC meeting. “One month does not make a trend,” a statement that could have been lifted from any of Chairman Powell’s many press conferences.
In sum, the FOMC press conference was more interesting and informative than the last one. The next press conference can be expected to be a humdinger. The very knowledgeable press corps has not been won over, and Chairman Warsh may have been surprised at the astuteness of the questions. He took more water breaks in this one press conference (at least four) than may have occurred in ALL of Jerome Powell’s press conferences combined. It’s a tough crowd, and these are tough times for central bankers.