by Michael P. Reinking, CFA & Eric Criscuolo

There's a new sheriff in town. In a bloodless transfer of power, Kevin Warsh assumed the Fed chair role from Jerome Powell and quickly put his stamp on things. A unanimous vote by the FOMC left the target rate unchanged at 3.5% to 3.75%. As expected, the easing bias was removed from the statement and it was shortened dramatically (130 words from 237), very to the point and left some room for interpretation. It was so short we’re including the statement below. 

The statement led with a reaffirmation “of maintaining ample reserves in the banking system” suggesting no change to balance sheet management (yet). The description of the economy and labor market were sanguine while productivity, something Warsh has talked about, was highlighted in the statement for the first time. There was a clear focus on inflation with the resounding ending “The Committee will deliver price stability.”

Within the Summary of Economic Projections, GDP and unemployment both ticked down slightly this year and were essentially unchanged in out years. The inflation estimates, however, were revised sharply higher and not projected to return to target until 2028.

Rate assumptions resolved hawkishly. The median DOT moved up to 3.8% from 3.4%, signaling a hike this year (but a cut in the two out years). Nine of eighteen committee members now expect at least one hike during the remainder of the year. Six expect two. There were zero for both in the last plot. Only one saw a cut, down from 12. Notably there was a missing DOT, which Warsh confirmed was his own during the press conference. A rate hike as soon as the next month is now 30% priced in, compared to less than 10% yesterday (table below). 1.6 hikes (39bp) are priced in by December, versus less than 1 hike (20b) yesterday.

The press conference had a very different tone as well. The overarching themes as we saw it were “changes are a comin”, “just the facts m’aam”, "forward guidance is a thing of the past" (well at least “not well-suited to the current policy conjuncture”), “there's a task force for that”, and a commitment to deliver price stability. During his prepared remarks the Chairman talked about the open-mindedness and thoughtful dialogue with members of the Committee to move the “Fed forward”.

Taking the eraser to the Statement and removal of forward guidance provided a lead-in to potentially dramatic changes to how the Fed operates overall. To that end, Warsh announced the creation of five task forces that will take a "fresh look" at things and make recommendations for changes in the following areas:

Those teams are expected to be assembled in the coming weeks with recommendations provided by the end of the year.

As a justification for removing forward guidance the Chair made it clear that market pricing is an important signal and that is being diluted by the previous communication regime:

Warsh made it clear that price stability was top of mind saying that, “We've missed the inflation goal for five years, we're going to fix it.” When discussing the task force and inflation frameworks he highlighted that the 2% target is outside the scope of the task force and will not be revisited until it is attained.  

The S&P was trading around unchanged heading into the statement release and dropped right after it. The index recovered to its pre-statement level during the first half of the Q&A session but then retreated to the lows in the second half when short-term yields extended higher from an already-significant move to the upside. That and more generally the heightened uncertainty from the lack of Fed guidance drove the move.

All sectors came under pressure. Industrials were nearly unchanged however, with Defense and Electrical names holding things together. Tech outperformed as well with Semis and Storage mitigating declines in software. Discretionary got hit across the board, including a 3% decline for AMZN, and the rate moves didn’t help homebuilders.

The 2y rate jumped 15bp at its highs over the course of the statement and presser. The 10y rose as well but 30y yield sold off before recovering to around unchanged. That could be a nod to Fed credibility in their inflation fight.