Instant Reaction: The Fed Decides

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1:12Let's create smarter business, IBM. 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. The Warsh Feds holds the benchmark rate to 3.5 % to 3.75%. Significantly changes the statement and splits evenly over whether there will be a rate cut this year. They see a rate increase this year. They see one cut each in 2027 and 2028. Nine members see at least one increase this year, with six of them seeing two moves, but nine see no moves or a cut. The median dot this year does move to 3.75 percent from 3.375 percent.

2:07However, for 2026, there are only 18 dots, suggesting the Fed chairman did not enter one. He said he doesn't believe in the dot plot. Two members did not submit a dot for 2028. The statement was cut to four paragraphs. The first, the vote unanimous. Then the decision, along with the statement that the committee reaffirmed its policy of maintaining ample reserves in the banking system. The second and third graphs are the economic assessment. Activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to conflict of the Middle East. Productivity growth and capital investment are strong.

2:46job gains have kept pace with the workforce and the unemployment rate has changed little. Inflation remains elevated relative to the committee's 2 % goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. There is no balance of risks anymore. The statement concludes the committee will deliver price stability. All 19 members of the committee did submit economic forecasts. GDP this year, 2.2%, down two-tenths from March. Unemployment will be 4.3%, up a tenth. PCE headline inflation will come in at 3.6%, significantly increased from 2.7 % in their March projection.

3:30Core similarly moves much higher to 3.3 % from 2.7%. Growth and unemployment for 2027 are unchanged from March, while PCE inflation falls back to 2.3 percent and core to two and a half. So some significant changes already under the Warsh Fed. We'll see what the chair has to say coming up in about a half an hour. Michael McKee, stay close. Definitely putting his mark on this Federal Reserve. Just to underscore what Mike was just saying, it looks like potentially Fed Chair Kevin Warsh did not put a dot. That is speculation. There were only 18 dots. There are 19 members. Meanwhile, you're looking at nine of 18 FOMC participants penciling in a 2026 rate hike.

4:16When you take a look at what that is in markets, you can see a huge shift up in the two year yield, a market shift of about seven basis points to 4.13 percent. You could see stocks rolling over as this continues, people bleeding in the idea of a more hawkish central bank, given that an increasing number of Fed participants are looking at a rate hike this year. When you take a look at the Nasdaq that is continuing to decline the S &P 500 down about half of a percent, Bob, what's your initial reaction given the fact this does seem to be a hawkish tilt on the committee and a very different statement?

4:53It is a hawkish tilt from the committee. Half of the committee is expecting rate hikes this year, which is, I think, a real shot across the bow to the market. We were thinking two, maybe three, to be decorative. We didn't think half the committee. So, you know, it's something quite different. When you look at the inflation projections, you know, we were thinking up a couple tenths. You're up six tenths, nine tenths for this year. So, nobody at the FOMC is thinking that this inflation will be transitory enough and we'll see disinflation between now and the end of the year. So, yeah, I think this is a Fed that is sending a hawkish message.

5:40I think you have a Fed chair telling us he can't be bothered with the dots. I think that's a slap across the face. We'll see how he deals with that and the Fed going forward. Scarlett, it seems like this is a real change, both in tone, both in substance, and frankly points to a hawkish committee and, as Bob said, a Fed chair that is doing away with the dots. So it'll be really interesting to see how Kevin Walsh comes out and frames everything when he does begin speaking, because if he leans dovish, it'll certainly be a case where he doesn't appear to be speaking on behalf of the committee. He's kind of speaking out there on his own, expressing his own views.

6:17It's fascinating because, again, he has not said a whole lot about his take on the economy, aside from his confirmation hearing before the Senate. So all of this raises a lot of questions. As you mentioned, stocks have extended their losses, and we now see the S &P and the Nasdaq losing two-thirds of one percent. Yields, again, have continued to stay higher. The two-year yield up nine basis points. The 10-year yield up about two basis points right now. Joining us now to extend the conversation, former Fed Vice Chair Rich Clarida. Rich, are you surprised that it appears that one member of the Fed did not submit a dot?

6:53Well, Lisa, thanks for having me on. I'm actually not surprised. I actually was inclined to think that Warsh would not submit a dot. But certainly the news that Mike McKee just shared with us that you had nine participants right down a rate hike was certainly above what I've been thinking going into this meeting for sure. Why do you think that is? What is it that the nine members see that has taken the market by surprise, certainly? Well, there was a big markup in core inflation projected relative to the March SEP. And I think the reality is that the pressure in core inflation that we've been seeing in recent data is not just a pass through from from energy prices, but but it does appear to be more broadly based.

7:39And I think that's probably a factor in these in this reassessment. Rich, the last line of the statement is the committee will deliver price stability, nothing about full employment. How do you interpret that? Well, it's not in front of me here because I'm doing your show, but that is an important change to the statement. You know, by statute, the Fed does have a dual mandate, and that's also highlighted in the firm's policy framework. And I'm sure I hope Kevin will be asked to elaborate on that at the press conference. We're at a point where we're at full employment or at least close to the Fed's assessment of maximum employment.

8:25So I wouldn't read into this that they're abandoning the employment mandate, but clearly some important change in the language for sure. Bob, what's your take on that? I think they are concerned by the level of inflation. They are concerned about what they see in the CapEx cycle. They are somewhat scarred for 2022 and they don't want to repeat that mistake again. And they're watching other central banks coming out and lifting rates and their bond markets responding well to that. So I think they're reconsidering certainly where they were last meeting and they're getting us ready for rate hikes.

9:03Rich, is there anything at all dovish in any way, shape or form of any part of this four paragraph statement?

9:12not not at first glance or for at first listen again at least for this meeting chair warsh will have the bully pulpit and i very much will be looking forward to seeing how he frames this and provides his own perspective but certainly i think we have an indication here especially with that sentence uh the committee will deliver price stability that's that's that sounds like where he's going to land for sure. So there's a comment here from Joseph Richter. He's one of our editors at Bloomberg Intelligence on our live blog. And he says that those who look for a quiet first Warsh FOMC meeting must be disappointed.

9:50Rich, what will you be listening for in particular from Kevin Warsh when he speaks today? I know you said it'll be interesting to see how he frames his thinking, but what will be the one thing that you want to hear from him? Well, let me give you more than one. Certainly, I would like to have him flesh out how the dual mandate fits into this at this point. Also, importantly, you know, he spent the last 15 years criticizing the Fed's big balance sheet. The Fed's growing, expanding its balance sheet now. And so perhaps moving beyond this meeting to the rest of the year and to next year, how he's going to try to change minds on the committee about the balance sheet size as well.

10:31Mike McKee, jump in here. Well, I think Rich raises an important point. The only reference to the balance sheet is the Fed reaffirming its commitment to the ample reserves policy, which is generic enough to encompass both Warsh's desire for a smaller balance sheet and others desire to maintain the corridor system that we have now. But the question is, do they go to that later? Is it just too much of a bridge to cross right now? Other points that I think are worth making is that while the committee dropped the bias statement and doesn't give any, quote unquote, forward guidance in the statement itself, the dot plot is forward guidance because all you're talking about right now is the nine people who think that we're going to get a rate increase and that this tells you that the Fed is hawkish.

11:21So if Kevin Warsh wants to walk that back, he's going to have to do that in the press conference. Otherwise, the markets are going to be tilting in that direction. It's also interesting that they did say they're committed to price stability. What it seems like is that the people who were worried about inflation, that worry has spread. And as Rich noted, the core inflation has broadened out some. And so they are sending a message to the markets that we're not going to let this get out of control. We're not going to repeat what happened in 2021-22. We are going to focus on price stability right now.

11:57The unsaid thing is that we're basically at full employment, so we don't have to worry about that for the moment. Mike, the other thing that jumped out at me is you said that we went from 18 dots to 17 dots for 2028. Is there an undercover supporter of Warsh policy in the FOMC now? It does seem like there might be, at least someone who supports the idea that the dot plot is not worth considering. It could also be that one member decided that there's just too much uncertainty for 2028, and why bother to add to that by just guessing it where rates are going to be? We've had a lot of Fed officials over the years tell us that they just kind of throw something in for the third year out because it's just too hard to project anything that far out.

12:42I wouldn't read too much into that, but the idea that Kevin Warsh did not submit a dot kind of tells you that he's going to maybe push to do some change to the dot plot going forward. If you are just joining us right now, we did get a statement that's four paragraphs long, much shorter than usual, with no reference to the employment mandate, with nine of the 18 members opting to support some sort of rate hike this year, leaving the others either in support of just keeping things where they are or potentially cutting rates. being taken as incredibly hawkish. You could see the sell-off in Treasury is extending.

13:18You could see two-year yields now up eight basis points across the curve, all rising, although this is yield curves flattening, this idea that potentially there will be some sort of tightening in policy. Former Fed Vice Chair Rich Clarida, final word from you. What's your question right now going to be for Fed Chair Kevin Warsh? Kevin, you did not submit a dot today. There's no forward guidance in the statement. The markets are taking the information today as hawkish. Would you be prepared to comment? Former Fed Vice Chair Rich Clarida, who might make a sneak appearance because that was pretty good.

13:59Thank you so much. Joining us now, Diane Swank of KPMG. Diane, what's your first take on this? Well, I'm actually not all that surprised. We saw a major move in the minutes to the last meeting where a lot of people were moving towards that hawkish chant and saying we may need to consider rate hikes later this year. And in the interim period, we have seen even Fed governors, which usually hold their cards a little closer to the vest, some of them who I've never seen actually take a firm stand, talk about how the price stability side of the mandate is more important now than the employment side of the mandate.

14:37And that's exactly what you saw with that last sentence in the statement was not that one was that we were not having a dual mandate. It's that the focus is on price stability, given the stability we've seen in the unemployment rate. And I think that's very important. What the Fed is saying, we're not going to take the inflation as transitory. What concerned so many at the Fed meeting in March when we saw sort of the initial forecast and there was a lot of uncertainty, but the minutes from that meeting really revealed how many people were already concerned about the data that was coming out that suggested that underlying core inflation was not only sticky, but maybe reaccelerating again.

15:21And I think that is where we're seeing this come from. It is beyond the energy shock. It is beyond tariff shocks. It's in that core super services component of inflation that we're seeing get sticky and hot and accelerate and not consistent with anything that resembles price stability. I want to go back to that idea, Diane, that the statement ends with the committee will deliver price stability. From where you sit, what are the most reliable inflation indicators that the committee will then focus on? If it's, of course, the reported numbers, but when it comes to inflation expectations, you've got market-based measures, you've got survey-based measures.

16:02Yeah, and none of these measures, they have at times, none of the Fed will never say inflation expectations are unanchored. And I think that's important. And a lot of these inflation measures on expectations do not look unanchored, although consumer sentiment certainly is not high at the moment. And I think the decoupling we've seen between consumer attitudes and their actual spending reflects the burn of inflation. And they're seeing that out there. They're also seeing in surveys like the ISM survey and the purchasing manager surveys, things where manufacturers are front running future price hikes.

16:38That's the exact behavior the Federal Reserve is tasked to prevent because that kind of hoarding behavior reinforces its own inflation cycle. So I think those kinds of behavioral shifts they're seeing out there, they're worried about the muscle memory of inflation. We're five years in and inflation is still a problem. Whether or not it's all the Fed's fault or not, it's only one institution's responsibility to derail inflation, and that is the Federal Reserve. And that's what you're seeing them sort of put their foot down now that the labor market situation, although not perfect, is not in the precarious situation it appeared to be last fall.

17:20You've noted, Diane, that one of the largest near-term hurdles for the central bank is the persistence of service sector inflation. What has proven to be the most effective way to bring down inflation in the services sector? Well, it's a sector that has been sort of impervious to some of the increases in interest rates we saw. We did see wages cool, but they've not cooled enough to bring it down. And I think part of the problem we're finding in the service sector is one, demographic and the aging demographics and upward pressure on some health care costs. But we also have other factors pushing up service sector inflation, and that is inequality and the ability of very high-end consumers to spend up, to buy at the front of the airplane and buy first-class tickets, to spend at high-end hotels.

18:07All of that is booing inflation at a time when many who are on the lower end or even in the middle part of the income strata are seeing their wages eroded relative to inflation, where we know at the highest end of the income strata that wages are actually going up more rapidly than inflation. And so that's one of the challenges the Fed faces is they've got to manage to the economic aggregates when the devil is in the details underneath those aggregates. Bob, you know what strikes me is that if you look at some of the economic projections here, a lot of people do seem clearly much more concerned about inflation.

18:45They revised up their core PCE between 3.2 and 3.5 percent for the entirety of this year, from 2.5 to 2.8 in the previous one. throughout all of these, even the Fed funds rate central tendency was moved up between 3.6 and 4.1. At this point, can we say we're at neutral? And can you say that right now, this is a Fed committee purely trained on inflation, just as Kevin Worsh reflected in that statement? They're telling us that we're not at neutral, even though they're, you know, the median dot, there's enough dispersion for higher inflation and higher rates it's telling us that maybe the market was right.

19:27Before the meeting, the market was pricing in one rate hike over year end into next year. It looks like they looked at the market and say, hey, it's giving us a rate hike. Inflation is not going to be at our target for five years going on to six. Maybe this is the opportunity for us to step in like every other central bank in hike rates. I thought we would get there. I didn't think we would get there at this meeting. The long end of the market likes it. Look at that. The front ends up six, seven, eight basis points. The long end's down a basis point. A Fed that's vigilant, again, creates support for the long end of the market.

20:01And actually, Diane, do you think that in some ways, just to conclude, this is actually a way to get the ultimate goal of rate cuts down the road by jaw voting the market into seeing this as a hawkish Federal Reserve? I think it is important. And I think it's also an acknowledgment, though. I mean, the context is important here. five years without hitting its inflation target and five years of compounding inflation is a problem for the U.S. economy. And they now have more flexibility with the labor market showing some signs of finally generating jobs, stable unemployment rate for a while now, with the exception of the six-week government shutdown and the weakness we saw at the end of 2025.

20:41And they're squarely focused on what they should be focused on. And I agree that the neutral rate is actually likely higher than what they thought it was. There were some that were moving there prior to this meeting as well, which means that in and of itself suggests they should have a higher short-term rate. And on top of that, we may need another hike as well. I still expect two hikes by year end. Wow. Diane Swank, thank you so much. Two rate hikes by year end. Can you imagine what that would do to markets? There are a couple of dots that point towards that direction, but the majority see one.

21:13Do you see that in any capacity, two rate hikes this year? I think it's possible. You do? Absolutely. There's a lot of underlying growth and capex in the economy, and we don't know whether the Middle East will be worked out. It's certainly not impossible. Joining us now is Matt Lizetti of Deutsche Bank, who's had a few minutes to look through this statement. What's your first reaction, Matt? Yeah, I think this was towards the hawkish end of what we could have expected. The two things that I was focused on ahead of the meeting were, one, how many dots we're going to show hikes this year. you have half of the dots, nine of them showing rate hikes, six of them showing 50 basis points or more of rate hikes.

21:49That has to be towards the hawkish end of expectations. The second thing and what drives the hawkishness in the dots is the upper division in their core inflation forecast. This year, they went up to 3.3 percent. I think really critically next year, they went up to 2.5 percent. You have a median expectation in the committee that more than six years into the inflation shock, inflation has still not gotten down to 2.5 percent. And within 50 basis points to their target, that is what's driving the necessity for potentially higher rates. So one of the comments from Ira Jersey, who's our interest rate strategist here at Bloomberg Intelligence, says that Warsh's stamp on the statement seems fairly evident with language moving closer to the style used before the global financial crisis.

22:27Is this a move to make the Fed less transparent, Matthew, with the statement really brought down, the word count brought down and the length of it reduced to the point where this is going to be a Fed that perhaps will surprise markets going forward as opposed to really calming them into submission. Yeah, I don't think that we learned too much about that from the statement today. I think the reality is that there was a lot of superfluous content in the statement. There was a fourth paragraph that has been in there really since the COVID shock and was probably unnecessary from that perspective. But it is clear we're just going to get less information in the statement.

23:03It'll be interesting to see how much additional information Warsh provides us in the press conference. He's been both critical of forward guidance, so I don't think that we get much more of that. But he's also been critical of data dependency. So the ultimate question is, what do we hear from him about at the press conference? That's still an unknown from the market's perspective. What's the one thing you want to hear from him? So I think I'm going to piggyback on Vice Chair Clarida's question from earlier. And it's a clear signal from the committee that higher rates might be needed to tame inflation.

23:30The market also believes that higher rates might be needed to tame inflation. We know that he didn't submit a dot yet today. But does he agree with the skew in those expectations that higher rates might be needed? And if not, why does he not agree with it? Matt, don't you think that the dots give us a lot of information? Won't you be sorry to see them go? Look how we talked about the dots nonstop. We looked at the nine voters that were looking for rate hikes. I would miss them. I don't know what being less transparent and more opaque actually does for the markets or for the Fed. Yeah, I don't know that I'll miss the dots, to be honest, Bob.

24:10I think too much focus is put on them. I'm sure Chair Warsh is going to mention that as well. I think ultimately over time they will go away. I think Warsh doesn't think that they serve a good purpose of actually providing meaningful forward guidance. I think they think that it's too precise. The market focuses too much on it and not the uncertainty bands around it. So eventually, I think that they will go. I think we'll be left with an SEP that shows the central tendency on Fed funds rate expectations, shows the range on Fed funds rate expectations. And that gives us the sense of overall where the trajectory of policy is going to be without kind of catalyzing us around one imprecise estimate from the median.

24:48You know, Matt, even if Kevin Warsh doesn't want to talk that much, the Fed chair can't muzzle everybody else. And there is a risk that potentially everybody else will talk a lot and give their perspective and suck the oxygen away from him, who's not saying very much. I mean, at what point do we end up in that type of scenario if the press conference holds true to what we're seeing, at least in the statement? Yeah, I think it could be over the next week. I mean, if we don't hear very much from from Chair Wash today, I would expect that we do hear a lot from other committee members over the next week.

25:16It's a very strong signal from the dot plot and the SCP that higher rights might be needed. And so I would expect that we hear from a number of those committee members. But exactly because of that, I actually don't expect that Warsh gives up his opportunity to do the press conference. There's some questions or speculation that he might not do a press conference after every meeting. I think he will, because it at least gives him the first chance to frame the meeting today. It gives him the first chance to frame that dot plot, which kind of clearly skews hawkish, and potentially push back on it if that's, in fact, what he wants.