Warsh’s Fed press conference leaves investors questioning his credibility as September rate hike odds rise
The Federal Reserve’s credibility has taken a hit after it held interest rates steady at its July policy meeting and Chairman Warsh offered what investors viewed as an evasive explanation. Investors reacted strongly. Warsh played down the likelihood of a rate hike at the Fed’s next meeting, but his comments also pushed long-term Treasury yields higher. Before becoming Fed chair, Warsh sharply criticized his predecessor, Jerome Powell. At the time, long-term Treasury yields rose after the Fed cut rates, and Warsh repeatedly argued that the problem stemmed from Powell’s lack of credibility. Wednesday’s situation was different: The Fed did not cut rates, but kept them unchanged. Warsh said the recent rise in long-term yields could reflect some positive economic news, such as strong business investment. The explanation failed to convince the market. Jon Hilsenrath, a longtime Fed analyst, wrote in a report to clients after Warsh’s press conference that Warsh needed to explain the conditions under which he would ultimately be willing to raise rates in response to stubborn inflation. Hilsenrath also wrote that Warsh had not clearly communicated his position and that the bond market was very disappointed. Warsh declined to answer detailed questions about why he and the other eight FOMC members believed rates should remain unchanged. In his opening statement Wednesday, he said: “I understand that people want the committee to provide rolling forecasts and commentary, but for us, we need to look directly and without filters at how markets are reacting to developments.” Economists said they were confused by several of Warsh’s comments. Eric Winograd, AllianceBernstein’s chief U.S. economist, wrote to clients: “I thought today’s press conference was confusing and often contradictory.” Consumer Price Index data showed that prices fell 0.4% in June, giving Warsh an opportunity to point to some positive economic data. But he said the factor had “little impact” on him, while emphasizing that inflation remained “elevated.” Warsh also said one of the five task forces he appointed to review Fed reforms could reduce the weight assigned to the Personal Consumption Expenditures price index, the Fed’s official inflation gauge, when it issues a report at the end of the year. “For now, we will continue to use PCE,” Warsh said. “Who knows? After January next year, we may reconsider the strategy.” Warsh’s refusal to specify what could prompt him to raise rates, combined with his suggestion that he may not support the Fed’s reliance on PCE, has led some market participants to reassess his statements during his brief tenure. Michael Feroli, the chief U.S. economist, wrote that “both points raise questions about the new chair’s credibility in bringing inflation down.” He added that the developments would prompt other committee members to carry out their responsibilities with greater urgency. September rate hike odds rise Economists said the Fed’s latest decision would intensify market expectations for a rate hike at its next meeting in September. According to the CME FedWatch tool, the probability that the Fed will leave rates unchanged at the next meeting rose by about 15 percentage points to 36.8%. The probability of a rate increase remained higher, at about 63.2%. In a report issued shortly after the Fed announced its decision, Avery Shenfeld, chief economist at CIBC Capital Markets, said the three dissenting votes represented “a rare degree of disagreement after the unanimous decision in June to leave rates unchanged.” He said the dissent “should keep the market on alert for a September rate hike, particularly as the prospect of war once again pushes up energy prices.” “Although our current forecast is that the Fed will leave rates unchanged for the rest of this year, that forecast assumes the disruption to oil shipments in the Middle East can end—and at this point, that is far from certain,” Shenfeld added. “If the Gulf conflict continues to worsen and energy prices keep rising, the September meeting could very well announce a 25-basis-point rate hike, which would push core inflation higher.” Ryan Young, a senior economist at the nonpartisan think tank Competitive Enterprise Institute, also highlighted the relatively large number of officials who voted to support a rate increase Wednesday. “Although the Fed left rates unchanged at this week’s meeting, it looks like a rate hike may be imminent,” Young added.
Investors reacted strongly. Warsh played down the likelihood of a rate hike at the Fed’s next meeting, but his comments also pushed long-term Treasury yields higher.
Before becoming Fed chair, Warsh sharply criticized his predecessor, Jerome Powell. At the time, long-term Treasury yields rose after the Fed cut rates, and Warsh repeatedly argued that the problem stemmed from Powell’s lack of credibility. Wednesday’s situation was different: The Fed did not cut rates, but kept them unchanged. Warsh said the recent rise in long-term yields could reflect some positive economic news, such as strong business investment.
The explanation failed to convince the market.
Jon Hilsenrath, a longtime Fed analyst, wrote in a report to clients after Warsh’s press conference that Warsh needed to explain the conditions under which he would ultimately be willing to raise rates in response to stubborn inflation. Hilsenrath also wrote that Warsh had not clearly communicated his position and that the bond market was very disappointed.
Warsh declined to answer detailed questions about why he and the other eight FOMC members believed rates should remain unchanged. In his opening statement Wednesday, he said: “I understand that people want the committee to provide rolling forecasts and commentary, but for us, we need to look directly and without filters at how markets are reacting to developments.”
Economists said they were confused by several of Warsh’s comments. Eric Winograd, AllianceBernstein’s chief U.S. economist, wrote to clients: “I thought today’s press conference was confusing and often contradictory.”
Consumer Price Index data showed that prices fell 0.4% in June, giving Warsh an opportunity to point to some positive economic data. But he said the factor had “little impact” on him, while emphasizing that inflation remained “elevated.”
Warsh also said one of the five task forces he appointed to review Fed reforms could reduce the weight assigned to the Personal Consumption Expenditures price index, the Fed’s official inflation gauge, when it issues a report at the end of the year. “For now, we will continue to use PCE,” Warsh said. “Who knows? After January next year, we may reconsider the strategy.”
Warsh’s refusal to specify what could prompt him to raise rates, combined with his suggestion that he may not support the Fed’s reliance on PCE, has led some market participants to reassess his statements during his brief tenure.
Michael Feroli, the chief U.S. economist, wrote that “both points raise questions about the new chair’s credibility in bringing inflation down.” He added that the developments would prompt other committee members to carry out their responsibilities with greater urgency.
September rate hike odds rise
Economists said the Fed’s latest decision would intensify market expectations for a rate hike at its next meeting in September. According to the CME FedWatch tool, the probability that the Fed will leave rates unchanged at the next meeting rose by about 15 percentage points to 36.8%. The probability of a rate increase remained higher, at about 63.2%.
In a report issued shortly after the Fed announced its decision, Avery Shenfeld, chief economist at CIBC Capital Markets, said the three dissenting votes represented “a rare degree of disagreement after the unanimous decision in June to leave rates unchanged.” He said the dissent “should keep the market on alert for a September rate hike, particularly as the prospect of war once again pushes up energy prices.”
“Although our current forecast is that the Fed will leave rates unchanged for the rest of this year, that forecast assumes the disruption to oil shipments in the Middle East can end—and at this point, that is far from certain,” Shenfeld added. “If the Gulf conflict continues to worsen and energy prices keep rising, the September meeting could very well announce a 25-basis-point rate hike, which would push core inflation higher.”
Ryan Young, a senior economist at the nonpartisan think tank Competitive Enterprise Institute, also highlighted the relatively large number of officials who voted to support a rate increase Wednesday.
“Although the Fed left rates unchanged at this week’s meeting, it looks like a rate hike may be imminent,” Young added.