It’s all talk and no action, and that’s the takeaway from Federal Reserve Chair Kevin Warsh’s second Fed meeting and subsequent press conference.
In a 9-3 split decision, the Federal Reserve left its key rate, the fed funds rate, unchanged at 3.50–3.75%. While it wasn’t entirely unexpected, Warsh’s tough talk in June raised the possibility that the Fed might raise its key rate last week.
The three dissenters favored a quarter-point hike.
Once again, Warsh came out swinging against inflation, insisting that the Fed will deliver on its goal to bring down inflation. He pointed out that inflation has been above the Fed’s target of 2% for over five years. His rhetoric and posture were unwavering and resolute.
But achieving the Fed’s goal of price stability hasn’t been easy. The Fed’s tools aren’t perfect. It’s not like a recipe. You know, mix several pre-measured ingredients and bake at a set temperature for a set amount of time.
Historically, the preferred tool in its toolkit has been interest rates.
But the lack of a rate hike on Wednesday, no hint of a rate hike in September, and a vague explanation as to why the Fed isn’t backing up its tough talk with action left investors, especially bond investors, with a feeling that the Fed’s bark is louder than its bite.
Warsh’s comments seemed to suggest the bond market was doing the heavy lifting for the Fed. He pointed out that the intra-meeting rise in bond yields was “among the most significant in the last two decades.”
The graphic below illustrates the rise in longer-term bond yields between the two meetings. And yields have edged higher since the Wednesday meeting.
Notably, the 30-year Treasury yield, a bond primarily purchased by institutional investors such as pension funds, is at its highest level since 2007, per Bloomberg.
Additionally, the large federal deficit and enormous need for capital for the AI buildout may also be playing a role.
Perhaps investors simply need to adjust to his style. Over the last two decades, investors have grown accustomed to guidance, signaling, and plain talk about the Fed’s intentions.
That’s not Warsh’s style.
Maybe the Fed chairman simply didn’t have the votes to raise rates. But I can’t stress enough how unusual it would be for a Fed chairman to side with the minority. It’s never happened.
There are those who believe inflation has peaked, and rate hikes aren’t needed. And Fed policy can’t produce one drop of oil.
Even so, the lack of congruence between tough talk and inaction left investors questioning the Fed’s commitment to its message.
