The cool news is that the latest data from the Federal Reserve‘s preferred inflation indicator came in lower than consensus in June, primarily due to a drop in energy prices.
The not-so-cool news? During his second Fed Day as Chairman of the U.S. central bank, Kevin Warsh hemmed and hawed over whether the Personal Consumption Expenditure price index would continue to serve that role.
And didn’t offer a hint as to what the replacement might be.
As I reported, this lack of transparent strategy really ticked off Wall Street — more than the Federal Open Market Committee’s decisive 9-3 vote to hold short-term benchmark interest rates steady July 29. Bonds sold off sharply with the 30-year Treasury hitting 5.22%.
Within hours of Warsh’s post-meeting press conference, J.P. Morgan abruptly shifted its forecast for the Fed’s interest-rate outlook to a hawkish one.
The headline on the note? “Talk is Cheap.”
J.P. Morgan Chief U.S. Economist Michael Feroli said the Fed would raise interest rates by 25 basis points in December instead of the second half of 2027.
The note to clients expects the Fed to continue to hold the Federal Funds Rate at 3.75%-4.00% after the December hike but added that the risk of a September rate increase is real.
Feroli’s research update said that Warsh’s ambiguous signaling raises concerns about the central bank’s inflation strategy.
“It’s hard to know what to make of Warsh’s remarks, which involved a lot of well-turned phrases but little in the way of a coherent macro view,” Feroli wrote to clients, adding that the new Chairman “once again failed to specify how he intended to achieve his stridently asserted inflation resolve,” creating additional policy uncertainty for financial markets.
Fed’s mandate balances interest rates, jobs and prices
The Fed’s congressional dual mandate requires full employment and price stability.
The FOMC post-meeting statement was a terse five paragraphs that described the economic activity as “expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.” It cited the energy shocks that have driven up prices in some sectors.
Warsh has repeatedly vowed the Fed would bring inflation down to its 2% target — a measure it has missed for the last 63 months. He deflected questions from reporters on July 29 as to how this will be achieved with responses that included that there is “no magic wand.”
(You can read the entire transcript of Warsh’s press conference here and watch the video here.)
