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Fed holds, but three voters dissent. (0:16) Warsh says markets are ‘playing the ball.’ (1:43) Long-term yields soar. (2:20)
The following is an abridged transcript:
The Federal Reserve kept interest rates unchanged at 3.5% to 3.75%. Normally we’d say “as expected,” but that doesn’t tell the whole story.
Markets had largely priced in no move, but the odds of a surprise quarter-point hike, along with whispers of a preemptive increase, grew throughout the day.
So, there were no fireworks with the fifth consecutive decision to leave rates unchanged. But it was what Janney strategist Guy LeBas called a “very dissent-y hold.”
Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who had been viewed as a potential swing vote toward a more hawkish committee, all favored a quarter-point hike. It was the first time since 2016 that three Fed officials dissented in the same direction on a decision to hold rates steady.
“The fact that three dissents are regional Fed presidents is interesting, but I don’t think Warsh will be this lucky in six weeks,” Renaissance Macro said.
“You either think the data saves them or you think they hike in September. They can’t keep doing nothing at this point.”
The committee also stuck with its just-the-facts approach, making only minimal changes to its statement from the previous meeting.
“No rationale for the hold, no hint at what a hike would take,” economist Claudia Sahm said. “Not one word of the data discussion changed after six weeks of inflation and jobs surprises. None, zip, nada. Never seen that.”
Economist Joseph Brusuelas said the Fed is moving “along lines that will continue to inject uncertainty and volatility into financial markets.”
“Parsimony, uncertainty and volatility are the point.”
During his press conference, Chairman Kevin Warsh again emphasized the Fed’s commitment to price stability, stressing there is no soft inflation target, only the 2% target.
He also praised the market’s reaction to reduced forward guidance, saying participants are “more than ever” responding to real-time events and are “learning to play the ball, not the referee.”
That could suggest Warsh believes tighter financial conditions can be achieved through market expectations rather than a higher fed funds rate. If so, it could advance his inflation objective without provoking President Trump’s wrath by raising rates.
Economist Dario Perkins wasn’t convinced, saying bluntly, “We have replaced forward guidance with spin.”
Looking at the markets, attention centered on the 30-year Treasury yield (US30Y), which hit 5.20%, an intraday level not seen since 2007.
Fed funds futures are now roughly split between a September hike and another hold, while swaps no longer fully price in a quarter-point increase at the next meeting.
Economist Peter Schiff said the bond market “is giving a thumbs-down to the Fed’s decision to choose inflation.”
“The Fed may have held short-term interest rates steady, but the market is raising long-term rates as investors choose to sell Treasuries and buy gold.”
Gold (XAUUSD:CUR) rose about 1%, while the greenback (DXY) fell roughly 0.5%.
In equities, after the typical Fed press conference chop, the major averages (SP500) (DJI) (COMP.IND) moved decisively lower.
