Fed Hold Rates Steady As Warsh Takes Helm: Fed Special

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yields

13 basis point rise on the two year to 4.18%

134 calls

no reliable edge (random outcomes)

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Show all 134 yields results

The Kevin Warsh Federal Reserve is very different from the Jerome Powell Fed: 132-word statement vs 175 words, new framework, no forward guidance, task forces. Markets are taking a hawkish tilt with declines across S&P and Russell 2000.

Scarlett Fu
Yield curve compression: 13bp rise on 2-year to 4.18%, idea of rate hike on the table. 30-year yield down 2bp. Dollar strength across the board.

Scarlett Fu
President Trump said it's 'all right' that they held rates, and that a rate hike is possible. No sign of anger. Treasury Secretary Bessent had eased the path.

Lisa Abramowicz
Kevin Warsh

I'm appointing a task force in five areas: Fed communications, balance sheet, data sources, productivity/jobs, inflation frameworks. Task forces begin work in weeks, framing by fall, concluding by year end.

My expectation is the task forces will begin work in the next couple of weeks, and we'll start to get some more information from them, some more framing of how they see things starting in the fall and hopefully most, if not all of them concluding by year end.
Kate Moore

Broad acknowledgement that economy is in good shape, rates not restricting any major sector outside housing. Positive tone about economy and institution functioning.

There was actually kind of a positive tone about both the economy and the functioning of the institution.
Jim Bianco

Task force including outside people means leaks, so might as well communicate in real time. This is welcome - Fed communication style is 20 years old and world has changed. Dot plot gave inaccurate forecasts we over-relied on.

The Fed needed to change this communication style that they have now is about 20 years old and the world has changed. Communication has changed, the role of the Fed has changed.
Kate Moore

Warsh is consistent with his past as a data-grounded governor. More consistency of policy between Powell and Warsh is comforting to markets even if risk assets dip.

We are having more consistency of policy here between the last meeting with Chair Powell and Chair Warsh, which I think is going to be comforting to the markets.
Kevin Warsh

Financial markets perform best when they react to incoming data, not when they ask how the Fed will react. Markets should price what they believe is most likely and tail risks.

The more that markets are paying attention to what's happening in the real economy, deciding what's good data and what's less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.
Jim Bianco

This echoes Goodhart's Law: when a measure becomes a target it ceases to be a measure. Market should be the thing the Fed follows, not the other way around.

If the Fed has already decided what they're going to do, then we can ignore the payroll report, we could ignore the CPI. Maybe we should be reacting to all of this and having the market express its best judgment.
Kate Moore

Market being an important signal for the Fed instead of manipulation. Hard not to anticipate what others are doing, but Warsh's point about market mechanism being powerful is clear.

It is really hard though as market participants not to try to anticipate what other market participants or other policymakers or other people making decisions are doing or interpreting with the data.
Michael McKee

Warsh doesn't necessarily think you should have a press conference after every meeting if you don't have something to say. Task force will look at what qualifies as important. He was very complimentary of Fed officials.

If you're in a situation where you don't know where inflation is going, where you're going to vote to hold rates where they are, does that require a press conference?
Kate Moore

Warsh repeating that we've been overshooting the target for five years was incredibly important and a comfort. Policy will be active in getting to the goal. Hard not to interpret as more hawkish than expected.

The target is two, not two point something. It reaffirms that commitment and the way that he'll work with the committee to get policy closer to target over time.
Jim Bianco

Statement is going to be flexible. Today it's inflation, could be labor market or real growth in six months. They didn't put anything about labor market in the statement - that's not a problem, inflation is.

If you go back to the statement, they didn't put anything in the statement. In the one question he said 'we're not worried about the labor market.' That is not a problem. The problem seems to be the inflation problem.
Stephanie Roth

Warsh is setting up to be a very credible Fed, smart about getting consensus. Not in favor of a hike today but that could change with data. More hawkish than some thought. Base case: inflation cools enough, labor softens, they don't have to hike.

Some people thought he would just come in and try to push through rate cuts because that's what the president wants. That wouldn't be very good for markets anyway. This was a very deliberate and patient approach.
Stephanie Roth

This silences critics who thought we wouldn't have an independent Fed under Warsh. He's looking at incoming data, not scared to hike, not giving way to pressure. Markets should want an independent Fed.

Just pushing through rates for the sake of appeasing the president is not something that will ultimately result in a better economy or markets at the end of the day.
Stephanie Roth

Nine members wanting to hike is substantially above expectations (3-6 expected). Half the committee is very much interested in hiking. Odds of a near-term hike have to rise.

Now we're talking about about half the committee is very much interested in hiking rates given the data that we have today.
Jim Bianco

Old adage: bond investors can stop panicking when the Fed starts panicking. Fed being vigilant about inflation should be positive for bonds. Yield curve flattening because long end not rising as much as front end.

In 2022, inflation hit 9% but with the Fed raising 75bp per meeting, it never got above 4.25% the entire year. The Fed was in full panic mode, bond investors on a relative basis held in.
Kate Moore

We've been very underweight duration at Citi. Inflation will be more persistent and broader than expected for quarters to come. Not buyers yet. Prefer equities over credit for risk asset exposure.

Equities have had a step down in valuation over 2026 because earnings have been much stronger than price movement. We're still close to 15-year high in credit valuations but significantly lower in equities.
Stephanie Roth

Warsh's 'uneven' comment on restrictiveness could initially be interpreted as dovish, but he later said you don't see it anywhere outside housing. That suggests economy is running fairly hot relative to rates - a hawkish comment.

Once you hear that further information, it suggests the economy is certainly running fairly hot relative to where rates are.
Stephanie Roth

Warsh was not mistaken to say he's not concerned with market moves. He delivered a message of credibility and the market is seeing through that. He knew he was delivering a balanced but somewhat hawkish message.

He came in there, he painted the Fed as a very credible institution, one that's working together. They might have family feuds at the table but they're going to come out and deliver an important and singular message.
Stephanie Roth

This should pull down longer-term inflation expectations. Fed is credible on getting inflation down. Two paths: through passage of time as shocks fade, or through rate hikes if needed. End goal is 2% inflation.

The hope or the expectation is you'll get it down through the passage of time and inflation has to come down because there have been shocks to the economy that should eventually fade. But if that doesn't play out, Warsh is certainly going to be behind the Fed hiking rates.
Jim Bianco

If Fed is committed to raising rates to fight inflation, long end should like it more than front end. Front end yields go up, long end holds steady or goes up a little - curve flattening.
Kate Moore

Looking for discussion about the person suggesting space for a rate cut in the minutes. Also inflation expectations and how Fed talks about market pricing. This was a split set of decisions.

There were people with varying different degrees of interpretation of the inflation data and the economy, how tight financial conditions are, how much we need to worry about breakevens.
Jim Bianco

Fed didn't disclose their vote for the first time ever - by design. This says the Fed is more independent. They'd rather keep it as a family fight and not have dissenting statements. Maybe minutes will help.

They don't want to be publishing 7-5 votes, 8-4 votes, having all these dissents. They'd rather keep it as a family fight, let them all hash it out in the meeting and then come out with a decision.
Jeffrey Rosenberg

First reaction is not always the right reaction. Risk of overplaying yield curve flattening. Market split between old reaction function (dot plot) and Warsh saying we'll get rid of dot plot. That undermines the hawkish interpretation.

The nine dots voting for a hike were well in excess of expectations and that's what moved the market. But then you have Warsh basically telling you we're going to get rid of the dot plot.
Jeffrey Rosenberg

Question is whether this is hawkish for rates or hawkish for the balance sheet. Warsh's history during post-GFC and his comments about transmission mechanisms suggest balance sheet changes may be more important.

The era of post-GFC was 'we will do whatever it takes' - central banks were dominant price makers. He wants to do away with that. The primary tool for doing away with that is the balance sheet.
Jeffrey Rosenberg

Warsh's comment about unevenness being due to transmission mechanisms is revealing: one about interest rates (housing), the other about balance sheet (financial conditions). This hints at changing the ample reserve system.

What has been the biggest beneficiary of the big balance sheet? The flattening of the term premium. That was the whole point of bond purchases - to bring down term premium. If signal is hawkish on balance sheet, I'm not sure your reaction is big curve flattening.
Jim Bianco

Question about whether balance sheet changes will take years like inflation targeting did under Bernanke. Fed Governor Barr is against it. Can this institution move that fast?
Jeffrey Rosenberg

Warsh's statement looked like Feb 1994 statements - same length, similar tonality. He changed communications on his first day. We won't be waiting five years. He expects committees to come back by year end.

How quickly did Fed Chair Warsh change the communications basically on his first day on the job? I don't think from that signal we're going to be waiting with this Fed and this Fed chair five years to make these kinds of changes.
Jeffrey Rosenberg

This isn't great for risk assets - shrinking balance sheet and hiking rates both tighten financial conditions. But Fed's role is secondary to real economy drivers: AI capex, earnings growth. May be opportunistic moment for Fed to step back.

The contribution particularly to risky assets of the Fed's role is much more secondary to what we're seeing in the real economy. The incredible amount of capital expenditures, the incredible amount of earnings growth.
Kate Moore

Agree with Rosenberg - equity market driven by AI earnings and capex beneficiaries, not coupled with rate position. But for smaller companies reliant on borrowing, rates trajectory not lower in near term means they can't borrow at attractive rates.

For the fringe companies, the smaller companies, those that are reliant on borrowing... we're getting a message very clearly from policymakers that the rates trajectory is not lower in the near term. At best case, we're kind of flat.
Jeffrey Rosenberg

The message for households and businesses is the recommitment to the Fed's price stability goal. All the task forces are in service of that, in recognition that for the past five years there's clearly been a failing on that part.
Jim Bianco

We're going to see a different type of Fed with different objective and communication style. Market reaction is appropriate. Fed is following other central banks - ECB raised, Bank of Japan raised, now Fed suggesting they'll raise too.

In the last week, the ECB has raised rates, the Bank of Japan has raised rates, and now the Federal Reserve is suggesting that they're going to raise rates too. So they're all moving in that direction.
Kate Moore

Love the message about working with FOMC and bringing outside voices. But 'your actions speak so loudly I can't hear what you're saying' - need to see follow-through in action, not just jawboning.

Let's see if there's follow through in terms of action and not just trying to jawbone the market to say 'hey, we do care about it' but we're not taking the necessary policy actions in order to get us closer to that goal.

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