The Big Picture

Briefing.com Summary:

*Fed Chair Warsh signaled a hawkish pause, prioritizing price stability and offering no forward guidance on future rate moves.

*The SEP raised inflation forecasts and removed expected 2026 rate cuts, implying restrictive policy may persist longer.

*Fed Chair Warsh is reshaping Fed policy communication, emphasizing shorter statements, fewer signals, and stronger inflation-fighting credibility.

The policy directive issued coming out of the June 16-17 Federal Open Market Committee meeting made it clear that there is a new manager at the helm. It was a very brief statement, bereft of any language signaling a policy bias.

If there was any nod toward a bias, it might be in the directive's last sentence: "The Committee will deliver price stability."

A New Approach

Yes, that was the concluding line to a directive showing a 12-0 vote to leave the target range for the fed funds rate unchanged at 3.50-3.75%.

There was a nod toward the uncertainty produced by the conflict in the Middle East, yet there was also a nod to productivity growth and capital investment being strong.

This meeting also produced an updated Summary of Economic Projections (SEP), which showed the washing out of any rate cut in 2026, according to the median projection, which now sits at 3.8% versus 3.4% previously. That makes sense, however, considering the SEP also featured upward revisions to the projections for 2026 PCE inflation (3.6% from 2.7%) and core PCE inflation (3.3% from 2.7%) that are well above the Fed's 2.0% target for inflation. Moreover, the projections for 2027 PCE inflation and core PCE inflation were bumped up to 2.3% and 2.5% from 2.2% and 2.2%, respectively.

Fed Chair Warsh did not have as much to say at his press conference as his predecessor, Jerome Powell, used to say, but he still said a lot. The market is having to come to grips with a new approach that is going to lack forward guidance and which, for now, is committed to delivering price stability.

Translation: There isn't going to be a rate cut soon, not with PCE inflation and core-PCE inflation running north of 3.0% in actual and expected terms.

If anything, the dot plot suggested there is a much greater probability of at least one rate hike before the end of the year. Accordingly, the totality of the messaging, from the directive to the press conference, could be summed up as being a "hawkish pause."

The initial reaction by the stock market was textbook. It didn't like that message.

The initial reaction by the Treasury market was not too dissimilar. The 2-yr note yield, which is more sensitive to changes in the fed funds rate, went from 4.06% to 4.21%, while the 10-yr note yield, which is more sensitive to changes in inflation, went from 4.43% to 4.49%. This is known as a "bear flattener trade," and it isn't typically the stock market's friend.

Briefing.com Analyst Insight

Mr. Warsh wasn't out to make enemies today. His aim was to lay out a new vision for the Fed's management of monetary policy, and he did just that, saying that he is appointing a task force in each of the five areas that are central to the broad conduct of monetary policy:

1. Fed communications
2. The Fed's balance sheet
3. The Fed's use and reliance on existing data sources
4. Productivity and jobs in an era of transformation
5. The Fed's inflation frameworks

The Fed is going to be sticking with its 2.0% target rate for inflation (for now), as he sees no reason to revisit that matter until the Fed has reestablished its commitment and ability to deliver on the 2.0% inflation objective, something he said the Fed has not done for five years.

It sounded like the market needs to get used to directives that are shorter and neutral in their presentation, that changes to the Summary of Economic Projections are likely, and that there may be fewer press conferences.

In other words, change is not only coming; it has already arrived.

Mr. Warsh is steering the policy ship now, and his first order coming out of port is not to pay lip service to the importance of delivering price stability but to actually deliver it. The market should appreciate that in due course if he can deliver, but it won't necessarily be smooth sailing along the way if restrictive policy is the antidote.

--Patrick J. O'Hare, Briefing.com