Fed chair Warsh has definitely stirred the pot with his latest forward guidance approach, or should I say lack thereof, as he wants markets to do the job on tightening instead.
I would argue that the press conference damaged his credibility more so than it looks like he laid down a marker, but we’ll have to see if markets agree to that. So far, the bond market is definitely hinting that if the Fed chair wants to play this game of poker, then we will be calling his bluff.
JP Morgan is one to offer a quick reaction to the FOMC meeting yesterday. The firm had previously only penciled in the next rate hike by the Fed in the second half of 2027. But after Warsh’s communique, they now expect a rate hike to follow in December this year instead. Commenting on the Fed chair:
“He once again failed to specify how he intended to achieve his stridently asserted inflation resolve. We believe this will add some urgency for the rest of the committee to act on its mandate.”
Warsh definitely could have played things better and there were so many options available for him to justify holding rates this week. Instead, he chose to bring up conversation on Fed credibility and his willingness to do the job in bringing inflation back down. Adding to that, he threw the ball back at markets – specifically the bond market – in doing the Fed’s bidding. That itself was quite a puzzling moment to say the least.
Overall, the mere uncertainty in his language and lack of a concrete plan is a major departure from what markets are used to under Yellen and Powell.
And we’re already seeing other analysts be quick to add their critique on that. MPA Macro noted that choosing to pinpoint that financial conditions had tightened was a “bad reason”. Adding that: “It’s almost reflecting doubt in the Fed’s resolve, so I don’t think this is something to advertise.”
Meanwhile, PGIM notes that: “We suspect that public comments from Warsh and other participants after this meeting will have to further double down on the hawkishness to clean up what was ultimately a perplexing press conference.”
This article was written by Justin Low at investinglive.com.
