Delayed fuse
Last night’s Federal Reserve decision held all the potential requirements for a momentous occasion. Markets had been ascribing a high value to the event with options pricing suggesting the decision posed a significant risk towards exposed assets. Ultimately, the potential swan song publication of Chair Jay Powell passed without incident. Claims from some news outlets that last night’s decision was the most divided since 1992 can be defended but have little relevance to today’s market. What is interesting is that some members appear to be signposting their intent to incoming Fed Chair Warsh.
First though, why was this meeting expected to be of such great importance? The turbulence in the fixed income markets lately has seen the market switch from expecting numerous cuts this year to frequent discussions of a need to hike. Only hours prior to the Federal Reserve’s publication, the US administration thew in another potentially inflationary curveball. The White House appeared to U-turn from its endeavour to sustain a cease-fire and instead appeared to be reconsidering military actions. This was in turn as a result of the stalemate in negotiations between the US and Iran regarding the Strait of Hormuz. What’s critical too is that many members of the FOMC have appeared to validate the market’s revision of the curve.
Last night’s decision was therefore an opportunity to see whether this Fed would be proactive on these war-induced inflationary pressures or wait to be reactive. The Fed ultimately held rates unchanged at 3.5-3.75% with only one vote for an immediate cut from Stephen Miran. Three members also opposed the Bank’s remaining ‘easing bias’ within the statement, showing an emerging hawkish persuasion amongst a significant portion of the FOMC. The market reaction will depend upon whether this is interpreted as a true signal of intent or just a warning shot to incoming Chair Warsh.
Discussion and Analysis by Charles Porter
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