Instant Reaction: Kevin Warsh's First News Conference as Fed Chair

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1:19Scarlet Fu:Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank N.A. Member FDIC. Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. A new Fed chair in a new era, as we do parse through some of the commentary. The Kevin Warsh Federal Reserve is a very different Federal Reserve than the Jerome Powell of Federal Reserve. Not only are we looking at a statement that was only 132 words versus the 175 words at the April FOMC meeting, we're talking about a new framework, a new regime, and not giving any forward guidance.

2:10Scarlet Fu:Because guess what? There's a task force for that. Right now, if you take a look at the reaction in markets, they're taking this hawkish tilt and they are running with it. You can see across the board declines on the S &P and the Russell 2000. Nasdaq now little changed as they parse through all of the reactions. When you take a look at the yield space, that's where some of the fireworks are happening. It is yield curve compression time in a massive, massive way. 13 basis point rise on the two year to 4.18 percent. Suddenly, the idea of one rate hike or even more is on the table as this Fed chair talks about how this Federal Reserve has a commitment to the American people to get price stability.

2:50Scarlet Fu:And that is their goal. He's poo-pooed some of the dual mandate, the 30-year yields. They like that, down two basis points. And it is dollar strength across the board. A big question, Scarlett Foo, was would the president have any commentary on this? And it turns out that he does. He does. He's spoken to reporters several times today. He's at the G7 in France, and he had said that it's all right that they held rates, whatever. He also said that the Fed raising rates is a possibility. It's possible. It could happen. So no sign of anger from him. We do know that Scott Besson, the Treasury Secretary, had kind of eased the path there.

3:26Scarlet Fu:He had been talking about the prospect of the Fed not being able to cut rates as the president would want, and that inflation, oil prices remains top of mind. So we did just listen to Fed Chair Kevin Warr speaking moments ago. Is there any kind of forward guidance? Where did you put your potential dot if you were to have a dot? Well, he has an answer for that. I'm appointing a task force in each of five areas that are central to the broad conduct of monetary policy. First, Fed communications. Second, the Fed's balance sheet. Third, our use and reliance on existing data sources. Fourth, productivity and jobs in an era of transformation.

4:12And last, the Fed's inflation frameworks. My expectation, I'm still in the business of recruiting and finalizing them. My expectation is the task forces will begin work in the next couple of weeks. And we'll start to get some more information from them, some more framing of how they see things starting in the fall and hopefully most, if not all of them concluding by year end.

4:35Scarlet Fu:Joining us now to discuss is Kate Moore of Citi and Jim Bianco of Bianco Research. Are either of you being recruited for the task force? We'll start with that. I just checked my text messages and nothing came through yet. So but it's still early after the presser. All right. What's your first reaction to what we just heard, Kate? Well, a couple of things. Number one, there was broad acknowledgement that the economy is in good shape. There's also broad acknowledgement that the rates as they currently stand are not actually restricting any major sector outside, of course, housing, which Warsh mentioned.

5:01And there was like a lot of collegial talk about, you know, how well the Fed is working together, how well they're communicating, how welcoming Warsh felt, you know, in his new chair position. And so there was actually kind of a positive tone about both the economy and the functioning of the institution.

5:16Scarlet Fu:And in terms of changes that he's made, Lisa, you already highlighted the fact that the statement was much shorter. The news conference was shorter as well. And we definitely heard a different side to these Fed news conferences. Jim, one thing that Kevin Walsh made clear was that for longer term changes, including communications, including the dot plot, there's going to be a task force for that. How do you anticipate that kind of information to come out? Is that going to be a surprise when it just comes out, or is he, the Fed, going to give markets time to digest all that? He also said that the task force might include people outside the Fed.

5:49So I would assume that you're going to have leaks, so you might as well be doing it almost in real time, telling us what's happening, because there's going to be some people outside the Fed. But in general, I think that this is a welcome thing. The Fed needed to change. This communication style that they have now is about 20 years old. And the world has changed. Communication has changed. The role of the Fed has changed. And so it is a positive thing. I'll also mention that one of the things that Warsh talked about before he was chairman was all of these prognostications. The Fed's going to cut rates according to the dot plot.

6:26He pointed out it very rarely happens the way that they say it's going to be. So it was always an institution that was giving an inaccurate forecast. And we were over-relying on that inaccurate forecast. And maybe it is time that they try a different approach.

6:39Scarlet Fu:Kate, is Chair Kevin Warsh kind of consistent with what former Fed Governor Kevin Warsh sounded like? I mean, I'm going to go back to this word I just mentioned a moment ago, collegial. I mean, it really felt like that was sort of the overall tone. And I think something is very important here, which is that we are having more consistency of policy here between last meeting with Chair Powell and Chair Warsh, which I think is going to be comforting to the markets even if risk assets dip a little bit on this news. It's just kind of reiterating what we already know though, right? That inflation has been warmer, spicier than many people had expected, certainly even pre the Iran conflict.

7:17And we know that there's been a broadening out of some of these price pressures while the labor market has been solid. I just feel like Chair Warsh made those points, conceded that, and so was consistent with the person that he has always been, which is someone who's really grounded in data.

7:32Scarlet Fu:There's also been a comment, and I thought that his answer to one of the questions was really interesting, about why he thinks that this shouldn't be an overly communicative Fed, how the data and how the market responds to the data should be done more purely. Take a listen to exactly what he had to say. I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question, how will the Federal Reserve react to that incoming information? The more that markets are paying attention to what's happening in the real economy, deciding what's good data and what's less good data, the more financial markets can price what they believe is the most likely.

8:19And what are the tail risks?

8:21Scarlet Fu:This actually, to me, highlighted a real question that's been asked. Jim, is this sort of codifying the fact that the Fed's going to follow the markets? The market is going to be sort of the arbitrator of what the Fed should do, because it is a pure indicator of the collective wisdom of crowds. I think the market should be the thing that the Fed follows. His statement reminded me of that famous line from the economist Charles Goodhart, when a measure becomes a target, it seeks being a measure, meaning if the Fed has already decided what they're going to do, then we can ignore the payroll report.

8:51We could ignore the CPI. Maybe we shouldn't. Maybe we should be reacting to all of this and having the market express its best judgment and then letting the Fed bring in that information that I agree with him is the proper way for things to be done than them to just summarily decide what they're going to do, say they care about the data, but they've already made up their mind. Kate, do you agree? Yeah, I think that makes a lot of sense, right? The market being an important signal, an important source of data for the Fed instead of this kind of manipulation. It is really hard, though, as market participants, not to try and to anticipate what other market participants or or other policymakers, or other people making decisions are doing or interpreting with the data.

9:28And that is part of the game and part of the behavioral side of things that we all incorporate into our process. But I think Chair Warsh's point was very clear that the market and that mechanism, Jim, as you're pointing out, is a really powerful mechanism, and we shouldn't fade it.

9:42Scarlet Fu:Right now, we want to get back with a part of the task force. I don't believe he actually has been appointed to a task force. He is officially the Bloomberg task force on the Federal Reserve. Bloomberg's Michael McKee. You are in the room. And the press conference actually went along, went on a little bit longer than some people had expected. The commitment to a press conference, though, not exactly concrete. His answer to you is really interesting. What was your takeaway from this conference? Well, the answer, of course, like almost all of his answers ended with there's a task force for that.

10:12But basically, they're going to look at all communications. And he did express the idea that he doesn't necessarily think you should have a press conference after every meeting if you don't have something to say. Now, that's going to be the thing that the task force is going to have to look at is what qualifies as something important to say today, obviously. But if you're in a situation where you don't know where inflation is going, where you're going to vote to hold rates where they are, does that require a press conference? If not, then how do the markets react? The Fed there is kind of leading the markets.

10:47And if they come to you and say, hey, come on over, we're going to have a press conference today, then they're also leading the markets. So it's a difficult needle to thread at this point, I think, for Warsh to try to get out of this, to put that genie back in the bottle. But we'll see what the task force comes up with. He was very, very complimentary of Fed officials today. And he basically framed this all as we're all working together to make this work better for monetary policy. So it's going to be we're all going to be sitting back and waiting for these task force reports to come out.

11:22Scarlet Fu:Michael McKee, thanks so much for all of your work and insight today. Just real quick here. It does seem like the market he's not necessarily paying attention to in the initial salvos of the reaction. He went on and said, honestly, I'm not that concerned in the first hours. That said, the idea that they dropped any kind of commentary on the labor market and the fact that he said we've missed for five years our inflation target. and we are going to fix that. Is there any other way to interpret this, other Kate, than unabashedly hawkish? I mean, look, here's what I would say. The fact that he repeated that we have been overshooting the target for five years, something our team talks about all of the time, I thought was incredibly important.

12:02And actually, it was a comfort to me, this acknowledgement that policy is going to be really active in terms of getting us to the goal. I thought that other comment he made around paying attention to the left of the decimal decimal point versus the right, that the target is two, not two and something, sort of reaffirms that commitment and the way that he'll work with the committee, frankly, to get policy in a place that we go closer to target over time. So it's hard not to interpret that where we are today as a little bit more hawkish than otherwise people might have expected.

12:35Scarlet Fu:But also that's thinking perhaps more clearly than perhaps what we had heard in the past, right? There's no two-ish, it's just two. And he's happy with that. I'm curious in terms of the labor market, there was a question posed about what the committee thinks of the labor market, Jim. And he said trends matter more than data points. The jobs data has been moving in a good direction. It feels like that's all he said about the labor market. He's not concerned with it one way or another. Yeah. And if you go back to the statement, they didn't put anything in the statement. And the one question he said, we're not worried about the labor market.

13:02Okay. That is not a problem. The problem seems to be the inflation problem. And that's what they addressed. So I almost suspect that this statement is going to be flexible. So today, now it's inflation. I could see a statement in, you know, six months, a year where there's no mention of inflation. It is all about the labor market. It's all about real growth then at that point.

13:23Scarlet Fu:Yeah. And he said that it wasn't necessarily in conflict with each other. Right now, let's bring in Stephanie Roth of Wolf Research, who's been listening to all of this. Stephanie, your first take on what we just heard from Fed Chair Kevin Warsh. Yeah, I mean, he's setting up to be a very credible Fed. He seems to be very smart about getting everybody on his side and getting the consensus. It seems while he was not in favor of a hike today, you know, that could very much change with the incoming data. So it was certainly more hawkish than what some people had thought. Some people thought he would just come in and try to push through rate cuts because that's what the president wants.

13:57And that wouldn't necessarily, quite frankly, be very good for markets anyway. So this was a very deliberate and patient approach. And we'll see through the path of incoming data how this plays out. Our base case is that inflation will cool enough. Labor market will show some signs of softening such that in the coming weeks they don't actually have to hike. But certainly the odds have risen after this meeting.

14:16Scarlet Fu:Stephanie, does this silence the critics who thought that we would not have an independent Fed under Kevin Warsh? Yes, I think it absolutely does. He is looking at the incoming data. He doesn't seem to be somebody who is scared to be hiking if we don't actually get closer to the inflation goal than would otherwise be the case. He doesn't seem to be giving way to any sort of pressure. So, I mean, that's a very good thing for markets. Markets should want an independent Fed. So just pushing through rates for the sake of appeasing the president is not something that will ultimately result in a better economy or markets at the end of the day.

14:50And I think we should all feel better about that after what we heard today.

14:53Scarlet Fu:How do you anticipate economists to respond or to react to the fact that nine of the members want to hike? I mean, how is this going to adjust what Wall Street thinks is going to happen with inflation? Yeah, you're seeing that in markets today. You know, the shorter end of the curve, rates are up significantly and you have to raise your odds of a near term hike, knowing that many more FOMC members than was generally expected are looking for a hike. Before this meeting, I would say somewhere between the expectation was somewhere between three and six members were expected to be penciling in a hike.

15:24Now you're substantially above that. So now we're talking about about half the committee is, you know, very much interested in hiking rates, given the data that we have today. So whatever your odds were of a hike, you know, before today, you know, it certainly has to be to be to be rising.

15:39Scarlet Fu:If you are just joining us, we're parsing through a very noteworthy Fed meeting, the first for Kevin Warsh as chairman. And he made a lot of changes. I did want to make one correction. I said that there were 175 words in the April statement. It was actually 341 words versus the 131 words in this latest statement. As we've been mentioning in markets, you can see a real hawkish tilt that is filtering through markets. I'm wondering, Jim, from your perspective, do you like long bonds better given what we just heard? I mean, does this actually give you more confidence that this is a Federal Reserve that wants to anchor inflation expectations at 2.0, not 2.something?

16:18It should. The old Wall Street adage that as a bond investor, I can stop panicking when the Fed starts panicking really applies. If the Fed is going to be vigilant about inflation, that in all of itself should be positive for bonds. Now, today it's positive for bonds with the yield curve flattening because they're not rising in yield as much as the front end of the curve. But yes, you know, if you want to go back to 2022 to give another example. The inflation rate hit 9 percent, but with the Fed raising rates, 75 basis points every meeting, it never got above four and a quarter the entire year.

16:51The Fed was in full panic mode. Bond investors on a relative basis held in. Kate, you agree? Oh, man, we have been very underweight duration for like the duration of my time here in Sydney, to be fair. And we have debated over and over again, what is it going to be that that lets us kind of extend duration in portfolios. But I just can't get there. I mean, our view is that inflation is going to be more persistent and broader than a lot of people expected for quarters to come. So even against that backdrop, against the comments from Chair Warsh and from kind of the tone of the FOMC, you know, we're just not in a place yet where we're buyers.

17:26How does this make you think about credit?

17:29Scarlet Fu:Would you be changing any of your allocation to it or what you prefer? Yeah, we think about credit, of course, in the risk asset spectrum, too, not just in terms of yield, right? And in this case, you know, equities, not credit, have had kind of a step down in valuation over the course of 2026, because, of course, earnings have been much stronger than the price movement. And so, you know, we're still close to that kind of 15-year high in terms of credit valuations, but we've come, you know, significantly lower in equities. We prefer to take our risk asset exposure in equities over credit. We've positioned that way over the course of the year.

18:01That doesn't mean no credit, but we just want to be more selective, frankly. And I wish I didn't just love equities so much and think they were going to go higher. Actually, a pause to breathe, I think, as we've seen over some last trading sessions, is a good thing going into the summer. But I also wish I could use fixed income more actively in portfolios. But given where we are in rates and inflation, as I said, we're very underweight duration.

18:23Scarlet Fu:Staying on that idea, we also heard from Kevin Warsh, Stephanie, about his thoughts on how restrictive policy is right now. And his answer was it's uneven. If you look at housing, for instance, Fed policy does appear restrictive because you have that affordability crisis, not just in the actual housing prices, but in mortgage rates. But he doesn't see that in financial markets, noting the record highs that we're seeing in equities and the tight spreads that we see in credit. How do you think about that? Yeah, I mean, so, you know, the initial idea of, well, policy is somewhat uneven. You could initially be interpreted as, well, that's somewhat of a dovish comment until he later said you don't really see it anywhere outside of housing.