– Warsh Welcomes Rising Bond Yields as Aiding Fed Inflation Fight
– Warsh Downplays Dissents; Says Committee United on ‘Delivering’ 2% Inflation
By Steven K. Beckner
(MaceNews) – The Federal Reserve’s policymaking Federal Open Market Committee left short-term interest rates unchanged Wednesday for the fifth straight meeting, but the Fed’s rate-setting body was sharply divided, with an unusual threesome of dissents in favor of higher rates.
Disappointing speculation by some on Wall Street that the Kevin Warsh-led Fed might spring a surprise rate hike to prove his commitment to price stability, the FOMC left the federal funds rate in a target range of 3.5% to 3.75%, where it’s been since December when the FOMC completed a series of rate cuts.
No less than three Federal Reserve Bank presidents — Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari, and Dallas’s Lorie Logan – voted against holding the policy rate steady. Those three FOMC members “preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting,” according to the statement. All members of the Board of Governors voted to hold rates steady.
However, Warsh insisted that the split vote did not indicate disunity on the Fed’s main objective, which he repeated is to “deliver” on the Fed’s “price stability” mandate. Moreover, he stressed, the FOMC’s inaction Wednesday should not be taken as a sign of “inertia.” Though it did not raise rates immediately, that is “not the end of the story,” he said.
In his second post-FOMC press conference since succeeding Jerome Powell as Fed chair on May 22, Warsh welcomed the “rigorous discussion” the 19-member Committee had had over the past two days, calling it “a good family fight.”
Warsh also welcomed what he called the “material” increase in market interest rates in recent weeks, suggesting that the bond markets were helping the Fed do its anti-inflation job by “tightening” financial conditions. And he maintained markets were demonstrating confidence that the FOMC “will deliver” on its commitment to bring inflation down to 2%.
As with its June 17 policy statement, the first issued under Warsh’s direction, the FOMC kept it simple. Once again there was none of the old “forward guidance” – no hint of what direction rates are most likely to go in coming months.
The succinct statement reiterated that “economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong.”
“Job gains have kept pace with the workforce, and the unemployment rate has changed little,” it continued.
The statement again said that “inflation remains elevated relative to the Committee’s 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.”
And it added a now familiar pledge: “The Committee will deliver price stability.”
There was no fresh set of rate projections and economic forecasts, since the next quarterly Summary of Economic Projections cum “dot plot” is not scheduled for release until the Sept. 15-16 FOMC meeting (presuming the reform-minded Warsh wants to perpetuate its publication).
The FOMC convened against a backdrop of re-escalating war in the Middle East and renewed upward pressure on oil prices.
Since the mid-June FOMC meeting, a smaller than expected June rise in the consumer price index and an oil price retreat served for a time to lessen inflation fears, but Warsh told the House Financial Services Committee after the CPI report on July 14 that he was not inclined to “cherry pick” favorable monthly data. What ‘s more, on the eve of Wednesday’s meeting oil prices rebounded sharply after a resumption of hostilities with Iran, which seems likely to push gasoline prices higher.
A June reading on the price index for personal consumption expenditures (PCE), due Thursday, is expected to show some moderation from May’s 4.1% year-over-year reading, but clearly Fed policymakers remain concerned and uncertain about the inflation outlook, we well as about inflation expectations.
Although the FOMC did not change monetary policy at this meeting, Warsh was determined that reporters not get the impression that nothing is happening in the war against inflation or that the
Fed is unwilling to take action after it has been running above target for more than five years.
“Though we haven’t done anything, the markets have done quite a bit,” he said, pointing to an increase in both nominal and real yields “across the Treasury curve.”
Warsh saw the yield spike, which he called “among the most significant in the last two decades,” a healthy development that reflects a new, evolving relationship between the market and a central bank that is no longer sending advance policy signals.
“In the intervening period, market attention centered on real data and real economic developments,” he explained. “Prices reacted in real time to incoming information, and the reduction in forward guidance may have been a factor.”
“Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit,” Warsh continued. “This is, in my view, a change for the better, and we’re just getting started.”
The Fed chief also claimed that financial markets are giving the Fed a vote of confidence.
“What we do isn’t just about what we say,” he said. “It’s not just about what we do.”
“We’re in the performance business and so if I look at the Treasury curve, if I look at the dollar, if I look at a lot of things that are internals inside of financial markets, I think what they’re broadly saying is, that this Committee does own it,” Warsh continued. “It has the credibility to deliver it, and they believe, like I do, that we will, but I don’t want to leave you with a missed impression.”
While refusing to hint at when the FOMC might raise rates, Warsh made clear he and his colleagues are prepared to do so if needed to ensure that the recent, more favorable inflation trend continues.
Objecting to characterizations of the Fed’s inaction as passive or as “tolerant” of high inflation, he said “this is a period of watchful thinking, not watchful waiting.”
Nor is the FOMC in “a pause,” as one reporter described the current state of monetary policy, Warsh declared.
“I wouldn’t characterize what we did is anything like a pause,” he said. “I would characterize what we did as a rigorous review of the economic situation. I would characterize what we did as a review of the big, hard questions, and I’d characterize it as a view of what our own homework is, to try to resolve those questions and the period ahead.”
“If you were to try to force a description that this was a pause, I would say financial market prices would take the other side of that,” he went on. “Financial market prices, in this intervening period, they didn’t pause. They reacted to the inflation data in one direction, strong economic growth in the other direction, and nominal and real rates went up.”
“Did the Fed take an explicit change in its policy rate today?” Warsh rhetorically asked.
“No, but I think that’s the beginning of the story, not the end of the story,” he answered.
In a further effort to disabuse impressions that the FOMC is moving too slowly against inflation, Warsh told reporters, ‘We have spent an inordinate amount of time in the last two days, two weeks, looking at our monetary policy strategy, evaluating our tools, thinking hard about the sources of data that we have at our disposal, and we wish we had.”
“We’ve also thought hard about the period ahead,” he said. “What among these questions will be answered, with more clarity, certainly not certainty. So, the decision we’ve made today, the discussion we had in that room, was the farthest thing from inertia I can imagine.”
Warsh added that Wednesday’s discussion “was far more robust and our thinking about how best to achieve that target is advanced and over the coming months I expect it to be advanced much more significantly.”
He acknowledged that there is “impatience” among households and businesses” to reduce inflation but pointed out that his tenure as Fed chair is only “eight and a half weeks” old.
“We are on-the-job, we will deliver, we are focused like a laser on making sure we can do it,” he declared. “But the suggestion that we’re going to be able to do it with our magic wand is one I want to disabuse you and everyone else of, but the discussion the last two days give me more confidence even than I had eight and a half weeks ago.”
“This team that we have at the FOMC, the support that we have from board staff, and the new hard questions we’re asking, we need to resolve those and as we resolve those questions get smarter on those, we’re going to deliver on the remit,” he added.
And again, Warsh pointed to bond yields. “ If you look broadly at market prices, they are certainly not saying “all clear” but they are working in concert to keep us on our toes and they have tightened financial conditions in this inter meeting period and that has given us, that has provided us some comfort that we’ve got the ability and capability to deliver.”
Although three FOMC members dissented, Warsh said the committee is “unanimous” in its determination to achieve price stability, as indeed minutes of the June FOMC meeting also showed.
“The way I heard it over the last two days was overwhelming agreement on objectives and authority and commitment,” he said. “I didn’t hear anybody walking away from it.”
“The judgments as to how best to achieve the price stability, that was probably the question we’re trying to answer,” Warsh elaborated. “What’s the best move? What’s the best strategy? What’s the best way to achieve it?”
“And a second question that was asked is when do we need to make those harder calls?” he continued. “When do we need to make those decisions, and …. I was comforted that markets in the intermeeting period weren’t reacting to us, they weren’t reacting to dots or to speeches. They appeared more than ever to be reacting to real time events so they’re gauging themselves how restrictive the Treasury curve should be and that I think has been a useful development.”
As shown by the three dissents; by the June SEP, and by the minutes of the June FOMC meeting, Fed policymakers are sharply divided.
Those divisions were on display in the lead-up to this week’s meeting. Before the pre-meeting blackout, comments by officials showed continued divergences of opinion, although they were still largely weighted toward concerns about inflation, with some explicitly supporting tighter monetary policy to address them.
One of the more hawkish was Gov. Lisa Cook who two weeks ago said she saw “a notable shift in the balance of risks relative to a year or so ago, with inflation risks now outweighing employment risks.” After saying she “believe(s) the risks continue to be strongly weighted toward higher inflation…” she warned, “If we do not see signs of disinflation soon, I am prepared to act. I am fully committed to reaching our inflation target, and this commitment is unwavering.”
Logan telegraphed her dissent the next day, Thursday, July 16, declaring, “I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC’s maximum employment and price stability goals.”
Hammack, a fellow dissenter, said the same day that “the labor market is right around my level of maximum employment,’ while “persistently high inflation is the bigger concern.”
Kansas City Fed President Jeffrey Schmid echoed those sentiments: “I believe the labor market is in balance and growth remains resilient. My primary concern is inflation, which is too hot and has been above target for too long. As such, my focus remains on inflation in setting the correct course for policy.”
Fed Board Vice Chairman Phillip Jefferson, who voted to hold rates steady, indicated a potential willingness to support future rate hikes: “(I)n a scenario where actual inflation does not start to cool down soon, I believe that it could be appropriate to reconsider our current policy stance to ensure we fulfill our commitment to deliver price stability.”
On the other hand, New York Fed President John Williams, the FOMC vice chairman, gave no indication he is prepared to raise rates any time soon in a Wednesday, July 15 speech.
While saying that “inflation is unquestionably too high at about 4%,” the FOMC vice said, “there are encouraging reasons to expect that inflation has peaked and should edge down in coming quarters.” And, as he has before, Williams said monetary policy is “well-positioned” to achieve that Fed’s goals of maximum employment and price stability.