A mosaic approach
With Chair Warsh minimizing direct Fed communication, we must look broader to discern policy.
“The Committee will deliver price stability.”
That was the last sentence of the greatly abbreviated statement the Federal Reserve issued following its June Federal Open Market Committee (FOMC) meeting. So much for the prohibition of promissory language.
New Chair Kevin Warsh essentially authored this line, which he paraphrased in his first press conference, repeating “price stability” more than ten times. While he might eat those words, it seems intended not just to make a bold statement but also to cleverly guide the financial markets to not expect rate cuts. But wouldn’t that be forward guidance, which Warsh has cast aside? Yes. But he cannot truly dispense with that. It’s too embedded in the system and is too good of a tool for influencing the Treasury yield curve. My guess is he simply wants to render guidance less explicit and instead offer a mosaic of hints and communications about the direction of policy.
If so, that shows considerable political acumen. Warsh must navigate the Fed in a narrow strait between President Trump’s insistence on easing rates and growing inflation, all while maintaining the central bank’s credibility and independence. Look for guidance in a mix of FOMC member speeches (which presumably will be curtailed), Chair Warsh’s own comments, the Summary of Economic Projections (even if watered down) and other publications like the Beige Book. The outcome of the five task forces Chair Warsh has commissioned will bring some clarity. We are not returning to the days when the Fed offered scant public information. Not even to the tenure of Chair Alan Greenspan, who passed away in June, when more communications emerged. But less guidance is welcome, especially as it was often inaccurate, or never came to fruition. In any case, the various yield curves might show some volatility until the markets get comfortable with the new “regime.”
Supreme Court cop out
In late June, the US Supreme Court ruled Lisa Cook will be allowed to remain a Fed governor while fighting the ongoing White House effort to fire her over allegations of mortgage fraud. But it did not explicitly prevent the administration from doing so if she is found guilty as charged after due process has been served. President Trump realized this, posting that he will “take appropriate action immediately.” That may amount to nothing, but it is clear Fed independence remains a question mark. It likely means former Fed Chair Jerome Powell will stay on the Board of Governors for longer.
Liquidity lifted higher
Even before half the 18 FOMC participants penciled in a rate hike by year-end, investors were already planning for rates to stay elevated, making the short end of the curve particularly attractive. That led to all-time high assets under management in US money market funds in June, no matter the calculation or source: iMoneyNet, the Investment Company Institute or Crane Data. Global asset levels also rose. Investors continued to seem comfortable with the current returns of most stable value products. The latter continue to expand in number and type, e.g., digital, offering new opportunities and use cases.
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