BY: Matthew Kimbrough
Senior Portfolio Manager
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was held steady at the current range of 3.50%–3.75%.
Today’s decision was once again not unanimous. There were multiple dissenting votes–Hammack, Logan, and Kashkari all dissented in favor of a 25bp rate hike.
Economic Projections
The next Statement of Economic Projections (SEP) will be released after the September FOMC meeting.
The Statement
This meeting’s statement contained few amendments, which are highlighted in the chart below.
Today’s Press Conference
In his pre-conference commentary, Warsh stressed that there is no soft or implicit inflation target and that the Committee is committed to achieving its 2% goal. He also elucidated four questions that the Committee tried to address. Bloomberg’s NLP sentiment model characterized the totality of these prepared remarks as very hawkish.
1| What are the implications of the last five years of high inflation on current policy, and has the past really passed?
2| How do all of the inflationary shocks of recent years differ in terms of their sources, their outputs, and their effects on output and employment?
3| Do the price increases in memory chips and AI infrastructure arising from recent shocks represent a broad inflation dynamic?
4| What monetary policy tools are available for achieving stable prices?
Warsh vowed to entertain press conferences at least through the end of the year. He stated that Jackson Hole may be an opportune time to provide further updates on “big picture questions” as he would be touching base with all five Task Forces in the interim between now and the end of August.
Warsh noted that a lack of forward guidance has meant that markets have started to react to events much more directly, and that this has led to a material tightening in both nominal and real rates in the inter-meeting period.
When pressed about his reaction function, he expressed that, as with most central bankers, when underlying inflation is moving higher, he’s more inclined to tighten, and when underlying inflation is moving lower, he’s more inclined to loosen policy. He also stated that in crisis mode it made sense for the Fed to provide more information, but that this might not be a prudent policy during a period of more benign economic conditions.
When asked about which measures of inflation he was relying on in order to achieve the Fed’s target, he stated that the Fed’s “lens is broader than PCE, even though its remit is quite narrow.”
The Market Reaction
2-year Treasury yields were up 4-5bp prior to the announcement of the decision, but reversed, falling 6-7bp during the press conference. The long end of the curve rose over 10bp, potentially indicating that the Fed didn’t do enough today to respond to inflationary concerns. U.S. equity indices were down 1-2%.
Not Investment Advice or an Offer | This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.
