There’s a New Sheriff in Town

New Fed Chair Takes Over

This was the week of the Federal Reserve’s (Fed’s) June meeting. There is a new chairman: Kevin Warsh. He follows Chairman Jerome Powell, who has served for the past eight years. Powell was criticized for his handling of the post-COVID inflation spikes. He famously called the inflation “transitory,” meaning a fleeting occurrence, and waited too long to raise rates to stop the runaway price increases. 

Recently, Powell has come under fire for his handling of cost overruns on the massive construction project at the Fed’s headquarters in Washington, D.C. Because he wants to see an investigation into him completed transparently, Powell has decided to take the very unusual path of staying on the Fed Board as a Governor, possibly to the end of his term. His term ends in 2028. 

Fed Holds the Line

Despite the odd situation of having your predecessor remain on the same committee you now chair, Warsh accomplished a great deal at his first meeting. At the press conference, he commanded the room, instilled confidence, and made significant changes. The Fed statement released was extremely short compared with the releases during Powell’s term. It was only 4 short paragraphs. He secured a unanimous vote on the policy.

As we have discussed, there have been an unprecedented number of dissenting votes over the past year. The Fed decided to leave rates unchanged despite recent murmurs that some members wanted to hike them. He committed to the 2% inflation target and said the Fed will meet it.

Dot Plot Rattles Markets

The markets reacted negatively to the Summary of Economic Projections (SEP) that was released. It showed an upgrade to inflation projections. Also known as the Dot Plot, it showed that about half the members expected at least one hike this year, eight expected none, and one expected a cut. Warsh made it clear that he didn’t participate in the SEP and that he does not believe in forward guidance. He is quite right. The SEP is rarely accurate in the long term, but it moves markets in the near term, which isn’t good for the economy.  

A Different Fed Approach

During the press conference, Warsh gave virtually no opinion answers. He spoke very highly of his fellow committee members and evaded “baited” questions by citing exactly what was in the approved statement. He wants the Fed to look at real-time data, communicate less, and create task forces to improve and reshape it. 

He stated that markets and the Fed should respond to real-time data, rather than markets reacting to Fed speakers and actions that interpret lagging data. This is a point we have repeatedly discussed. He stated that press conferences will only occur when he has something important to say. This was a very different tone from the previous 8 years.

Rates Benefit from Peace Hopes

Rates generally improved this week due to the outlook for a potential continued peace in Iran following the new 14-point Memorandum of Understanding (MOU). There is still a constant barrage of headlines from the region showing that peace clearly hasn’t arrived and that oil may not be freely flowing yet. Markets will still be watching this closely.  

Looking Ahead: Inflation Data in Focus

Markets were closed on Friday for the Juneteenth Federal holiday.

• Wednesday, June 24: New Home Sales
• Thursday, June 25: Personal Consumption Expenditures (PCE), GDP third estimate, Jobless Claims