Warsh squares off against a newly hawkish Fed
Warsh’s new colleagues will by tradition greet him cordially and pledge their support as they meet to consider interest rates. But if his intention is a quick rate cut, the new chairman might be entering a hostile work environment.
An analysis by Deutsche Bank, using a large language model to evaluate every speech by the voters on the Federal Open Market Committee’s since the most recent meeting, in April, found 11 were hawkish, five were neutral, and one can said to be dovish.
And all but two have grown more hawkish since the May meeting. Hawks prefer higher interest rates, doves lower.
“This pronounced hawkish trend signals the Committee’s re-evaluation of the balance of risks, pointing to increasing risks that rate hikes might be needed,” analysts for Deutsche Bank wrote.
That analysis could explain why, despite a potential Iran deal and a sharp fall in oil prices, market futures tied to interest rates trade with a 60% probability of a December rate hike.
Among the voters, three presidents of the Fed’s regional reserve banks were rated most hawkish. They are Beth Hammack of the Cleveland Fed, Lorie Logan of Dallas and Neel Kashkari of Minneapolis,
Governor Jerome Powell, Vice Chair Philip Jefferson and New York Fed president John Williams came in neutral. Vice Chair for Supervision Michelle Bowman was the lonesome dove.
But even among the more-neutral group, speeches became more hawkish.
There is no “obvious kind of direction where we would go in the future,” Williams said in early June.
Warsh spoke positively at his confirmation hearing in April of the potential for artificial intelligence to prompt growth without worsening inflation but didn’t give a detailed analysis of his latest views. His press conference Wednesday will air his thinking for the first time as chairman.
Making an argument to the FOMC may be a challenge, said Michael Feroli, chief U.S. economist at JPMorgan. “When dealing with true experts, Warsh will need to sharpen his case and add specifics,” Feroli said.
Warsh may need to wait for the data to go his way. He can’t quickly change the committee itself. The presidency of the Atlanta Fed is open, but that position doesn’t vote until 2027 under the Fed’s rotation for regional bank presidents.
Governor Lisa Cook is awaiting a ruling from the Supreme Court on President Donald Trump’s attempt last year to fire her.
In 2028, Powell’s term will end, and the regional bank presidencies in New York, Richmond, and San Francisco are expected to roll over.
Early retirements are always possible. Fed governors serve 14-year appointments, but in practice the average term is just five years, according to the Hutchings Center on Fiscal and Monetary Policy at the Brookings Institution.
— Matt Peterson, Steve Liesman
Kalshi traders forecast a more united Fed in June after a divided one in April
April’s meeting of the Federal Reserve surprised observers when it yielded four dissents. Traders on prediction market platform Kalshi forecast a more united Fed in its June meeting.
Speculators think there’s a 70% chance there will be zero dissents in the central bank’s interest rate decision set to be released Wednesday. Chances that there are four dissents again are extremely low at just 3%.
Former Fed Governor Stephen Miran was among the dissenters in April, arguing that the Federal Open Market Committee should have lowered rates rather than held them steady.
Regional presidents Beth Hammack of Cleveland, Neil Kashkari of Minneapolis and Lorie Logan of Dallas also dissented, but not because they disagreed with the decision to hold off on altering rates. Instead, they argued the central bank should have removed its “easing bias,” where the Federal Open Market Committee hinted at future rate cuts.
Read more here.
— Davis Giangiulio
Warsh expected to forego ‘dot’
One thing that could be missing from Warsh’s first meeting will be his place on the vaunted “dot plot” of rate expectations.
Fed watchers expect Warsh could pass on inserting his view on the future path of rates from the grid, which is watched closely on Wall Street but has had an uneven track record as a forecasting tool. The dot plot is part of the larger Summary of Economic Projections, which includes views from the 19 Federal Open Market Committee meeting participants on inflation, unemployment and gross domestic product.
Warsh has voiced a strong dislike of such “forward guidance” tools because he feels they hamstring policymakers.
Warsh “could argue that he simply didn’t have enough time to work with the staff to build out a forecast, given that he was only sworn in on May 22. But we think he will be more direct, stating that he doesn’t plan to submit SEP forecasts because he doesn’t believe in forward guidance,” Bank of America economist Adiya Bhave said in a note.
“This could be a ‘win-win”‘ for Warsh — he could undermine the SEP without potentially upsetting the rest of the committee by abolishing it,” Bhave added.
—Jeff Cox
Market sees no chance of a hike or cut at this meeting
There’s virtually no chance the Federal Reserve will move interest rates when it announces its latest decision Wednesday, according to the CME Group’s FedWatch monitor of futures market pricing.
Traders are assigning a zero percent probability to a cut or hike when the Federal Open Market Committee announces its decision at 2 p.m. ET.
In fact, the market is pricing in little chance of any move until the FOMC’s final meeting of the year, on Dec. 8-9, when it is pricing in a 60% probability of a quarter percentage point hike. Since the last committee meeting in April, no FOMC officials have spoken in favor of hikes or cuts, though several have said they worry high inflation could force an increase if it persists.
—Jeff Cox
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