“We are unambiguously and unanimously committed to delivering price stability,” Kevin Warsh. “The Fed has missed the inflation target for five years and we are going to fix that.”
Yowza.
Warsh hammered this point home repeatedly. I told you he was an apex inflation predator, but I thought he would toe the line to keep Trump happy for at least a little bit. I was wrong. This was max hawkish.
The front end is getting whacked (+16bps, awful for caps) because half of the FOMC members project at least one hike this year. The long end is behaving better, with the T10 up 4bps. The yield curve is the flattest it’s been in a year.
Futures markets put odds of a hike next month at 40%, 50% in September, and an 80% probability of a hike by year end. At the G7, Trump commented, “They held rates, whatever.” Yes, that’s a real quote. Trump also said about the possibility of raising rates? “It could happen.” Sounds like Scott Bessent offered Trump some forward guidance to front run a verbal explosion.
While Warsh plans on limiting Fed forward guidance, he did use the opportunity to announce he is creating five task forces. The first one will decide whether the Fed continues to offer forecasts, press conferences, and even transcripts from the meetings.
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Fed communication
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Fed balance sheet
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Use and reliance on data sources
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Productivity and jobs in an era of transformation
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Inflation framework
This is unprece…wait, what the heck is that?
(hydration break)
Ok….so now the Fed Chair needs a hydration break? I wonder if Trump is rolling around on the ground grabbing his ankle…
OK, back to the meeting. Warsh wants the Fed to drop forward guidance as part of the FOMC meetings. It remains to be seen how much Fed officials will adhere to that in their own speaking engagements, but it’s clear he is trying to reshape the Fed hot out of the gate.
There’s a good chance we don’t have press conferences after FOMC meetings at some point in the future.
“I think that markets perform best when reacting to incoming data, they work less efficiently when they ask how will the Fed react.”
Fed Funds
Only 18 submissions out of 19 participants, with Warsh withholding his own estimates. Remember, his goal is to reduce forward guidance and he hopes to do away with the dots entirely. Also notable was they didn’t disclose the vote (eg, this many dissented).
- Half (9) participants penciled in a hike this year
- 1 penciled in 3 hikes
- 5 penciled in 2 hikes
- 1 penciled in one cut
- 0 penciled in more than one cut
On the labor market, the comment that struck me the most: “I don’t believe in the cruel choice between inflation and jobs.”
I’ve positioned the Fed’s reluctance to hike as unwilling to hurt the job market. This suggests the bar to hike might be lower than it was under Powell. Also, keep in mind that there are only two instances of a single hike: 1997 and 2015, so if they hike once it’s probable they hike a second time.
Before you curl up into the fetal position like a soccer player that encountered a stiff breeze, some good news…
The ultimate landing spot (“longer run”) is actually a tad lower, just around 3%.
More good news because I’m cool like that, rate vol is actually down.
My takeaway
Apparently, Warsh didn’t need a task force to send a message that he’s independent of Trump. I think he laid those concerns to rest (part of why the T10 isn’t spiking).
I still don’t think the Fed hikes. They are talking tough today so they don't have to hike tomorrow…I think…gulp…
Keep in mind, only 12 actually vote on rates at each meeting and we have no way of knowing which ones of the 9 that expect hikes have an actual vote. In the past, Fed participants without a vote have used the dots to express forward guidance even if they didn’t actually expect a hike.
Until the task force eliminates the dots, I think this is how the Fed sends a tough message to the market and hopes they don’t have to hike.
I am out on a limb with that, though. SMBC immediately reiterated its call for 100bps of hikes in the next year.
Oh, and the most important thing…blue tie!
Random hedging thought
If you’ve been looking at caps and getting crushed, corridors could be an alternative.
Let’s start with a plain vanilla cap:
Cap
4.00%, $365k
Expected payout $5k
*if the Fed doesn’t hike two times, you just threw away $360k.
I am not normally fans of corridors, but in an period of extreme volatility they can be a good way to leverage vol to your advantage with offsetting positions.
Corridor
Buy 3.65%, Sell 4.65%, $365k
Expected payout $270k
*Spend the same amount, get $265k more value
Powell was in the Room
Warsh made some comments that felt like attacks on Powell. Last interesting note…how different Trump’s response was to no rate cut today vs how he has handled that in the last year. I’m not sure how long Warsh can avoid taking friendly fire from Trump.
