The Big Picture
Briefing.com Summary:
*The FOMC voted 12-0 to raise the target range for the fed funds rate by 25 basis points.
*Bond yields spiked in reaction to Fed Chair Warsh's comments.
*The latest move by the FOMC was a "hawkish hike," not a "dovish hike."
The FOMC decision everyone was waiting for—and expecting—is out. The FOMC voted to raise the target range for the fed funds rate by 25 basis points to 3.75-4.00%. The surprise dynamic of that decision is that it was a unanimous vote (12-0).
That unanimity implied Fed Chair Warsh voted for the rate hike, as did his predecessor, Jerome Powell. There will be a natural tendency to highlight that agreement as a strong signal that Mr. Warsh and the Fed are not being steered by politics. We'll let others argue that point. We are simply explaining how the market might be inclined to read that 12-0 vote.
The directive called attention to the uncertainty driven by geopolitical developments, as well as to the fact that domestic spending has been resilient. The driving principle, though, is that "inflation remains elevated." The directive concludes with a direct message: "The Committee will deliver price stability."
In other words, the FOMC may not be done yet raising rates if progress on inflation isn't seen. That perspective is embedded in the dot plot, which shows 16 of 18 Fed officials expecting at least one more rate hike this year. There isn't a consensus on a rate cut, either, until 2028.
A lot will change between now and then, so these dots can very much be thought of as moving targets. For now, it can be said Fed Chair Warsh and his committee took a shot at bringing down inflation by raising rates.
The initial market reaction to that decision and a Summary of Economic Projections that saw an increase in the median estimate for the change in real GDP this year (to 2.3% from 2.2%), the change in PCE inflation (to 3.7% from 3.6%), the change in core PCE inflation (to 3.4% from 3.3%), and a decrease in the unemployment rate (to 4.1% from 4.3%) was relatively muted, but that changed when Fed Chair Warsh's press conference didn't exactly go the market's way.
What market participants heard was a Fed chair who recognizes that the Fed has met the employment side of its mandate but still has work to do to meet the inflation side of its mandate.
Mr. Warsh said he will not prejudge any future decision, but his language surrounding that view made it sound as if the FOMC believes it has more work to do. To wit, he also said:
- The plain fact is that inflation is too high and has been for too long.
- The Committee's unanimous vote shows our resolve to achieve price stability on a timelier basis.
- My colleagues were hard-pressed to describe financial conditions as being restrictive.
- We are committed to a discipline, not a decision. Today's action starts (emphasis our own) to show we are serious about this, and we will deliver on the price stability objective.
The Treasury market listened to what was said, and its initial reaction implied that there is a belief that the inflation fight isn't a one-and-done rate hike kind of thing. The 2-yr note yield spiked from 4.60% shortly before the policy announcement at 2:00 p.m. ET to 4.73% as of this writing. The 10-yr note yield went from 4.95% to 5.02%.
In turn, stock prices fell as rates rose, with equity investors cognizant that the Fed's latest action and the chair's comments fall into the camp of being a "hawkish hike" (i.e., there is more to come), as opposed to a "dovish hike" (i.e., there is a good chance that we are done).
That sense of things may have just raised the ante for the Bank of Japan, which is also expected to raise its key interest rate, with an alternate aim of trying to shore up the yen in a manner that could possibly stoke an unwinding of yen-based carry trades that would drive added volatility for capital markets.
