After all that waiting and wondering, what exactly did we learn from the Fed yesterday? Judging by the market reaction and pricing, I would say not a whole lot.
Fed chair Warsh spent a good chunk of time talking, even though it was a shortened press conference, yet December rate hike expectations did not materially change by much. All in all, quite the productive afternoon for the central bank, eh?
If I had to pack all of it in a sentence, I’d call it a whole lot of nothing for December market pricing but not necessarily a meaningless Fed meeting.
Prior to the decision, traders had priced in roughly 88% odds of a 25 bps rate hike for December. And now after Warsh’s press conference? That sits roughly around 82% odds. If terms of basis points, that’s just a shift from roughly 22 bps to approximately 20 bps now. So, that’s not really saying much.
The Fed did upgrade its assessment of economic growth from “solid” to “strong”, while two policymakers dissented in favour of an immediate rate hike. Hammack was perhaps expected but Cook was a bit of a surprise, though it wasn’t anything major come what may. In any case, those can be interpreted as hawkish signals but Warsh wasn’t exactly quick to embrace them.
Instead, he chose to argue that stronger productivity could help explain why resilient economic growth doesn’t necessarily translate into more inflation. Adding that with previous tightening already starting to bite, there’s good reason not to rush another move for now.
The only real surprise of the day came when Warsh announced changes to future FOMC meetings. Starting next year, one of the Fed’s eight scheduled meetings will be devoted entirely to longer-term policy strategy. That’s right. There will be no interest rate decision tied to that meeting. And in 2028, we’ll see two of that meetings take place.
Interesting, no? Such a move would mean fewer opportunities to tweak policy settings and that could lead to longer gaps between policy decisions, potentially making incoming data and the remaining meetings even more consequential. Of course, the Fed can still act between meetings if necessary. However, that usually only applies to extraordinary circumstances.
That aside, we’re pretty much back where we started when it comes to the market pricing and expectations for the December meeting.
A rate hike remains the base case but Warsh clearly wants to preserve some flexibility and optionality. For all the talking yesterday, Warsh essentially handed the ball straight back to economic data to decide the state of play next.
This article was written by Justin Low at investinglive.com.
