After overseeing his second Federal Open Funds Market Committee meeting, Federal Reserve Chairman Kevin Warsh remains committed to operating with less market commentary to get a direct and unfiltered messaging from the markets as they negotiate Treasury prices and the foreign exchange value of the dollar.
The adjustment period saw significant increases in nominal and real rates, and the new flow of ideas, or trickle, has left some market participants feeling overlooked.
"The FOMC has chosen to ignore a strong message from the bond market that the Fed Funds rate should be higher," according to Brad Conger, chief investment officer at Hirtle & Co., noting that the U.S. two-year and 10-year Treasury rates are up 0.75% and 0.50%, respectively. "The real neutral rate sits higher, and we are much further away from neutral than we should be."
Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit.
Hirtle & Co. is long duration, believing that market rea rates are ahead of the FOMC, Conger said.
"The initial market reaction appears dovish with front end rates rallying," according to Daniel Siluk, head of global short duration & liquidity, and a portfolio manager at Janus Henderson Investors. He added, "that largely reflects the removal of an unusually high probability of a July move that had been priced going into this meeting."
Siluk said pricing dynamics ahead of the September meeting had moderated from fully priced to roughly 75%, but he still characterizes the outcome as a hawkish hold, essentially.
"The statement was essentially unchanged, growth and inflation language remained firm, and the three dissents in favor of a hike underscore that a meaningful faction of the committee remains concerned about inflation," Siluk said.
Warsh's new direction of offering less commentary in between policy decisions doesn't mean the rule book itself is closed. It does suggest that the market is adapting to leaning more heavily on real data and real economic developments to make pricing decisions, Warsh said, during the post-meeting press conference on Wednesday, adding that the change might be for the better.
"Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit," Warsh said.
The Federal Open Markets Committee voted overwhelmingly, with nine in favor, to maintain the Fed Funds rate at 3.5% to 3.75% after its July meeting. Three committee members dissented.
Higher pricing was just one point of discussion during the recent FOMC meeting, Warsh said. Another is that the economy is seeing strong growth in business investments.
"The surge in capex has been remarkable. That does not necessarily make the Fed's role any easier," Warsh said.
The committee remains resolute in achieving price stability, as inflation remains elevated above its 2% goal, Warsh said.
"There is no soft inflation target. There is no soft, implicit target," Warsh said.
