Instant Reaction: Fed Chair Kevin Warsh on Fed Policy

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2:15FedShare Kevin Walsh wrapping up the news conference in Washington, D.C., a 25 basis point interest rate hike. The forecast implies there's one more to come later this year and a lean to perhaps even more in 2027. Live from New York City this afternoon. Good afternoon to you all. This is the price action. A hawkish opening statement from a Fed chairman helping to drive equities lower down on the session by 0.4 % in the bond market. Twos, tens, thirties just sit on the front end of the curve. Yields up six basis points on twos. We breach 470 on a two year. we're higher for a seventh consecutive session, the highest yield at the front end of the curve since July 2024.

2:53As for the hawkish speak, take a listen to the chairman of the Federal Reserve. Inflation remains elevated. Today's policy action will support a timelier return to the committee's 2 % goal. I would be hard pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So we removed a dose of accommodation. We removed a dose of accommodation. Just a subtle sign that maybe you'll have to do just a little bit more of that. This line from the Fed chairman. Today's action starts to show that we're serious about this. It starts to show that we're serious about this.

3:32This market believing there's more action to come from this Fed chair. It isn't just a statement of economic projections. and Michael McKee asked a great question of how do you reconcile a statement of economic projections that doesn't see inflation at 2 % until 2029. This Fed chair said, those are not my projections. We will deliver price stability. Today's action, to your point, starts to show we're serious about this. And that is where you saw the inflection lower when it comes to stock valuations and where you saw that inflection higher in the front end of the yield curve. So Stephanie Rothawalt's research standing by.

4:03We'll get to her in just a moment. We'll speak Neil Dutton as well. He's going to jump on for us too. Before we get into all of this, I just want to sit on the tone of the news conference. Sitting at home watching this, you might have noticed a subtle difference here. Felt tighter. Q &A, the cadence was different. Mike McKee, before going into this, told us that they weren't allowed to ask follow-up questions to the Fed chair. That's why this lasted only 30 minutes. Everything was tighter. He was far more selective about what he answered. There were a few questions wasted on the president because he was never going to engage in any of that.

4:33But a different cadence to this news conference, certainly compared to what we heard last time around back in July. Arguably, he was speaking to somebody else as well, because the number of press members from a wider range of press were also called on. That was notable. To me, it was also interesting that he was trying to retrain people, saying, if you ask two-part questions, I'll pick which part I want to answer. So essentially, that was also a very different tone, tighter, with a much clearer message, which is we need to do more. And And right now, these financial conditions are not restrictive in any way, shape or form.

5:03I'm going to keep my opinion out of it because we've got wonderful guests coming up. I will editorialize that was a disaster. And as Lisa's noticed, it moved like a hockey stick move, which is what Ben Bernanke would call it. There was a hockey stick move. And I heard a single sentence, and this is the heart of the matter. And he said, we're looking at discipline, not a decision. He's running an MBA course out at Stanford. And the rest of the economists are trying to do macroeconomics. I'm not sure I would agree. I don't know that he would think that this was actually a disaster because ultimately what you saw is a flattening in the yield curve and you saw a capping at the long end of.

5:37I got the 30 year, the 30 year real yield on three basis points to a new record high. I got two point eight standard deviations on DXY. Those are those are huge moves. If this FOMC committee is truly concerned about inflation, they should not be concerned about the idea that there is a little bit more restrictiveness being baked into financial conditions, which count as lower stock prices and higher bond yields at the front end. Ultimately, isn't that exactly what he's calling for? A lot of people have criticized this Fed chair for not articulating a reaction function. I think he's given us something here and he gave us something in Jackson Hole, too.

6:10The number of inflation categories that are trading above or printing above 3 percent. He referenced that once again. That's going to be a key metric for this market every time we get the inflation report. How many inflation categories are still rising more than 3 %? Are you seeing an increase, decline remain the same? And is that going to be your steer for how hawkish or dovish this Fed chair might be at the upcoming meetings? Especially as it pertains to geopolitics. He talked about geopolitics. They can control oil prices. They can control second order effects. Where does that come through?

6:42In the broadening out of inflation metrics. He also said, I'm not waiting breathlessly on any particular data point. What he is doing is looking at the trend lines. Sure. And that broadening out is a key one. You know that meme? Sure, Jan. We discuss it often. Yes. I have to say, come on. That was a ridiculous statement to make. It was. Because for the first time in a long time, there was a feeling that the only thing that mattered with regards to this decision was the inflation print just in the last week. And the difference between being a 0.2 and a 0.3 was a market that was either going to price a hike or price a hold.

7:12Maybe Kevin Warsh wasn't waiting breathlessly, but everybody in the market was. And ultimately, they traded on that. And ultimately, the Fed came through with what the market was deciding. Mike McKee was in the news conference. We've all got a home bias, of course. Mike McKee always asks the best question in the news conference. Mike, you nailed it. Before we get to that, I want to talk about the difference in the cadence. This was a different performance. It was a different setup. It was a very different news conference compared to what we heard at the end of July. Mike, you were in it. What changed?

7:39Well, a lot changed. They changed the seating chart for one thing and moved reporters all around by alphabetical order, an effort, they say, to give more fairness. And they certainly called on a lot of different reporters this time. But you notice that Kevin Warsh was much more direct and he spoke in very short sound bites. He did not give us long answers about what they thought or what they think the economy is doing. He was just very direct. Also, I think that he is trying very hard not to give us anything to hang on, although he did in his statement, which is a little more direct than he did in July, say, as you mentioned, that he is worried about the breadth of inflation.

8:20So a different style. It was much shorter, only 30 minutes. And a different kind of questioning was sort of brought forth. Mike, that word timelier, to get inflation back to target in a timelier manner. You indicated, you pointed out, you highlighted it immediately. You don't see it in the forecast. Were you satisfied with his response to your question? No, I wasn't. And unfortunately, they don't allow follow up questions because I would have followed up on that point. It's not a question of whether he submitted a forecast or not. And it may be the other 18 people who did, who put that at 2029 to reach 2 percent.

9:01But he's still the chairman and he's still responsible. for the statement which said they're going to bring inflation down in a timelier manner. And then they say they're not. So how they square that, I don't know. I would have also liked to ask him where they see inflation that the Fed can't affect, because obviously they can't affect the price of oil and other commodities. Mike, thank you, buddy. Stay close. We'll come back to you in the next 30 minutes or so. Mike McKee breaking it down. Last point is a really important point. How much influence do they have over the dominant sources of inflation right now?

9:34I can think of one, which is oil and energy, and they don't have much influence over that at all. Which is the reason why they're looking at the broadening out the second, the third order affairs. I will say we didn't hear from Kevin Warsh how he squares that circle. We will hear from all the other Fed officials as they speak in the upcoming weeks. And ultimately, this is a great question to ask them. And we will get their sense of what timeliness really means. I think we've got Governor Mickey Bowman coming up on Friday, don't we? I think she'll have words. Friday morning going into the weekend, she'll have some things to say.

10:00We've got Stephanie Roth of Wolf Research with us around the table. Let's start there. Stephanie, good afternoon. What was your takeaway from this decision this afternoon? It was a hawkish one. And, you know, it was consistent with his his comments at Jackson Hole. There was a question about whether he really believed them or to what extent that was just fixing prior communications. But he kept coming back to financial conditions and talking about, you know, alluding that they're not really restrictive at this point. And it was a very believable delivery of a relatively hawkish hike. Mike, what did you make of the commentary about how removing some of the accommodation is how he views today's move and the idea that this is the start of an ongoing, deliberate effort to get serious about price stability?

10:43Yeah, I think that was one of the single most important lines in what we heard today and one of the reasons why you're seeing markets react the way they are, that this is certainly not a one and done, so that's over. I think the data will ultimately look a little bit better such that they can probably just end up hiking twice but it certainly suggests that there's a lot more or considerable more accommodation to be removed. I got eight ways to go here but I've got to go right now to what the markets are voting on as we speak. These are seismic moves. I have a hockey stick move on the 10-year real yield out to new highs, the 30-year real yield out to three basis points and the DXY is popping 2.8 standard deviation strong dollar.

11:24What's the market voting on right now based off what they heard? The market's expecting they're going to do a string of hikes more than certainly the... Or is it a lack of confidence in the chairman's tone where he's looking at process and not decision? I think it's more of the former. I think the market is just expecting that he sounded a lot more hawkish than they expected. now we have to price in a greater string of hikes. I don't think it's necessarily a lack of credibility comment here. I think it's more about they're going to do more than certainly many expected before the meeting. Let's just unpack inflation.

11:59So he's given us a metric now. There's a target to focus on. It's the amount of inflation categories above and more than 3%. So we'll all look at that. What's influencing that? What are the dominant causes of inflation right now? Let's just start there. What are they? I mean, I would say there's three main categories of inflation that's driving above-trend inflation. It's been the grand war, which you talked about in terms of geopolitics driving yields higher. It's been the chip shortage, which I would argue is the most important one to keep an eye on because that's something that hasn't gone away.

12:28And then the combination of the tariffs that have put into place. Now, those are going to be very much rolling off, right? So when we're thinking about what's the inflation and the percentage of inflation categories that are going to be above 3 % in a couple months' time, when we forecast that out, those metrics are going to look a lot lower in a couple months' time. He's been talking about the 6-12 month trend of that. If you look at the 3-month, it's down a lot. The 6-12 month are going to follow. So because of those three categories, you're going to see it look a lot better in a couple months' time.

13:05It's obvious why I just asked that question. You've identified three things that have absolutely nothing to do with rate policy at the Federal Reserve. All three of them. what influence do they have over any of those things? Not that much, realistically. So why are we doing this this afternoon for anything other than just a credibility hike at this institution? What is it really about? What does it achieve? I mean, to some extent, it is a credibility hike. If you talk about what we were discussing a couple of days ago, it was, you know, are they going to hike? Are they not going to hike? It's going to depend on a couple of basis points and core PCE.

13:36And then, of course, today they deliver a much more hawkish hike. Like the data didn't, Core PC was tracking about 0.23 percent based on our numbers for the month of August, which is kind of in line with what Waller said was an area where they could sit back and hold reliably. But the market took them there. The market wanted them to hike and they had to deliver it. Earlier this year, it seemed like the majority of the Federal Reserve Committee was saying that rates were moderately restrictive. That changed to we're not sure. Let's check it out. and then quickly that they are accommodative and that ultimately the implication is they need to take back those 75 basis points of insurance cuts from last year.

14:17One thing that Fed Chair Kevin Warsh said that I thought was really important was my suspicion coming into the committee was that the U.S. economy was strengthening. The underlying growth was higher than people think. Do people have to start thinking about a higher neutral rate and the persistence of this, not only as a new normal, but potentially significantly higher in the foreseeable future? I mean, I think that is what markets, and to some extent the Fed was telling you today because they shifted up their long run. I don't think that's ultimately going to be how this plays out. I mean, you consistently hear people talking about 6.5 % nominal GDP growth and concerned about is 5 % actually the right level of the 10-year, given where nominal GDP growth is going to be.

14:55If you fast forward a couple of quarters, that's going to be a lot slower than where we are today. Drew Mattis emailing in from MetLife with all of his work at UBS, John, over the years. long-end rates rose equals failure. And where the markets are placing right now, particularly the correlated markets away from the basic five things we look at, some of these are shocking moves that we're seeing. I have real trouble believing it's just about the data. To the restrictive point, it's about this booming nominal GDP economy. He did allude to that to give him credit. If you want some tough moves in a market today, check out the equity market, lift the lid on things and look at the banks.

15:30Banks are getting knocked about off the back of this decision. They've had some difficult guidance from the likes of Bank of America more recently, too. But I just noticed Goldman on the Bloomberg drop in some four or five percentage points this afternoon. Brammo going into the close of the next 45 minutes or so. Banks have held up really well for the year so far. In fact, they've traded really well because nominal GDP is so strong off the back of that hawkish Fed speak. Just started to see those banks slide in response to that move in a yield curve. I want to go to something Brian Moynihan said recently, which is that as rates and rate volatility increased, a lot of issuers have held back in some of the deals they were planning to transact in.

16:06And that slowed some of the capital markets activity. At what point is that the one channel that the FOMC can actually affect, which is the financial conditions as expressed in all of the issuance that we have seen so far this year? Ultimately, how much are the banks an expression of that? Check out the yield curve. Just bring up the bonds board. Twos, tens, thirties. We'll just take a sneak peek of things right now. Yields down at the long end, up at the front end. That's a flatter curve, up by six or seven basis points on two. So that's the highest yield at the front end of the curve going back to July 24.

16:36Seven days of this now, Brammo, at the front end of the curve. Something we've seen just a little hint of, a flatter curve, starting to see it even more so this afternoon. I wonder if that's the start of a bigger trend here for this market, that flatter curve driven not just by the front end, but also at the long end as well. There is an expression that this is the new neutral, right, that rates are not going to come down materially, even if the Fed does hike rates by three more times this year. And ultimately, how much do you see that as the expression of 5 % 10-year yields, even with potentially a pretty hawkish tone?

17:06We had Lucas before, Charles Goodhart, Hugh Von Steenis writing up on Goodhart in the FT, I believe it was. Today, our historic moment today was Newt Vixell, 1898, where he trotted it out as some form of academics of the real rate. I would love to know what John Williams thought about this press conference. When I was with Waller a number of months ago, my question that stopped him was, are there two real rates for America? The haves have a real rate and the have nots have a real rate. John Williams basically codified the real rate. And this guy's quoting Newt Vixell from 18... The only one I know that can quote 1898 intelligently is John writing.

17:42That's it. I mean, I... This ability for him to trot out, who's going to be the next historic moment he's going to trot out? I'll let you pick, Mike McKee might bring us some history right now. He wants to add into this conversation. Mike, welcome back in. What have you got to add? Well, I want to point out what you were just talking about in terms of there being a higher neutral rate. They did forecast that in the median dot. They raised it to 3.2 percent from 3.1 percent, and it was 3 percent last year. So they have been moving up the neutral rate, and that may be one reason that they felt they wanted to increase rates this time because neutral is higher.

18:20And we've seen that reflected in real rates. You look at the 10-year Treasury real rate, and it's basically at an 18-year high. So at this point, it may not be as much inflation as it is just a reordering of the economy. Stay with us. More from Bloomberg surveillance coming up after this. If you invest, lead a business, or allocate capital, one-sided views aren't enough. Join me, Brad Rogoff, the Global Head of Research at Barclays, on the Flipside podcast. Each month, I go head-to-head with one of our expert analysts on my global team to debate the economic and market issues that matter most.

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21:07conference. Equities declining, going into the close. We're down by about three quarters of one percent now on the S &P 500, rolling over. You'll see in the bond market, two-year yields are elevated off the back of this as well. The two-year at the front end of the curve, up by six basis points to about 472. The long end coming in, we're starting to see that curve flatter. Again, we're down by about two basis points on 30s at about 535. The chairman of the Federal Reserve with a few things to say about where monetary policy is and isn't right now. Take a listen to what he had to say about the start, potentially, of a process.

21:42My commitment in June was to reaffirm to the American people, to anyone listening, that we will deliver price stability. My commitment in July was to say we want to buy a little bit of time. We want to evaluate what's happening across a range of dimensions. And what I said in Jackson Hole in August is we're committed to a discipline, not to a decision. Today's action starts to show we're serious about this and we will deliver on the price stability objective. This chairman was direct and intentional throughout this news conference. His responses were tight. They were tailored for certain audiences at certain times.

22:22This line jumped out to me. Today's action starts to show, starts to show. We are serious about this and we will deliver on the price stability objective. Neil Dutter of Renmac joins us now for more. Neil, good afternoon, buddy. Good to see you. 25 basis points. I assume you do think there's more to go. Yeah, I do. I mean, I think there's certainly more to go. I'm a little sceptical that it's just going to be one more. I think the Fed will end up delivering more than that. But if you look at their forecast revisions, I mean, what do people really expect? I mean, the unemployment rate was revised down.

22:58Core inflation was revised up. I mean, to the extent that they raised their longer run estimate, that means they're kind of moving the policy rate in tandem with that. So the overall level of the policy stance, restrictive, accommodative, doesn't really change. And I think the bigger question that markets need to deal with here is, do you actually need to cool the economy down to get inflation to 2 %? There's a lot of people that don't seem to think that. And I don't know. And so that's kind of where I'm at right now. I mean, I think a lot of the sort of one and done kind of discussion that we saw going into this is really just it's sort of like the nature of the sell side.

23:40Right. Like a few weeks ago, no one even thought that they would hike in September. Some people thought the next move would be a cut. Right. So you kind of have to mark to mark your forecast. And now you have to start to think a little bit about where we're going to go over the next three to six months. Yeah. And, you know, my general sense is we know that labor market conditions have stabilized at the margin. The fact that employment is running above break even implies that the bias for the unemployment rate, at least over the next couple of months, is lower. And there's still pass through from all the things the Fed has highlighted in the minutes.