Takeaway: He’s no one’s sock puppet! Now that Kevin Warsh has the job, he’s ready to make changes. It will take markets a while to fully digest the full breadth of today’s meeting, but the hawkish shift in the committee’s projections will keep mortgage rates high for now. In some ways though, that’s almost besides the point given the scope of the changes coming in this new era.
In a normal Fed meeting, the headline today would have been that the Fed shifted from projecting a cut to projecting a hike by year end. That change and the statement’s terse concluding sentence–“The Committee will deliver price stability.“–make clear that neither the Chairman nor the committee are interested in giving the White House their desired rate cuts given the current inflation backdrop.
- The committee voted unanimously to hold rates steady as markets had expected.
- The drama is in the so-called “dot plot” where the committee forecasts future policy. The last dot plot from March expected a rate cut, but today’s dot plot predicts a rate hike over the next six months, a pretty dramatic swing that skips over simply holding rates steady.
- In fact, six of the 18 committee members submitting a projection expect more than one rate hike.
- Interestingly, Warsh noted multiple times that the housing market is one of the few places where the current level of rates is holding activity back, but the Fed is uninterested in coming to the rescue.
The more consequential outcome today is that Kevin Warsh firmly marked the beginning of a new era. He has every intention of re-examining how the Fed operates.
- During the confirmation process, Warsh made it clear that he saw a need for the Fed to pare back communications and its balance sheet. Today he showed that he intends to deliver on those fronts. Time will tell where it all lands, but change is coming.
- On communications, today’s statement is slimmer than Fed statements we’ve gotten used to over the last couple of decades. It was simple and it stripped out the clues previous statements had on the Fed’s next steps.
- The dot plot was released today, but only 18 votes were present. In a highly unusual move, Warsh held back his own dot and, if the other developments are any indication, the dot plot itself may not be long for this world.
- Warsh also announced the creation of no less than five task forces. They are being asked to go back to first principles and question the Fed’s practices in these areas: communications, balance sheet, use and reliance on existing data sources, productivity and jobs in an era of transformation, and inflation framework. We won’t know until next year what the task forces recommend, but given the tone of today’s press conference, big changes could be coming to how the Fed has fundamentally operated since the financial crisis.
- The scope of changes Warsh is seeking to implement is immense and will be controversial. He referred a few times to enjoying a good old “family fight.”
