On course for Warsh?
The latest Federal Reserve decision concluded last night. Mirroring the prior decision, the FOMC voted to keep policy rates on hold within a band of 3.5-3.75%. Ordinarily, yesterday’s meeting could have been a lesser-event. After all, with the arrival of Chair Jay Powell’s successor on May 15th, this could have been a place holding decision with any material action liable to be unwound by the incoming Chairman. On balance, yesterday’s decision does still seem materially important and retained significant market impact, not least due to the geopolitical circumstances within which it was delivered.
There has been a lot of movement within the bond market. A trend at a global scale, but perhaps most notable outside of the US, has been for softness in debt markets. This has been in response to the growth inhibiting and inflation fuelling spike in prompt dated commodities, particularly energy. The US’ relationship with energy is unique and has evolved significantly over the past few decades. The US is a net exporter of oil these days meaning that a sharp rise in the price of the commodity can be a net positive for the current account. However, that doesn’t stop consumers’ spending power being drained by higher costs, still inviting the inflationary risk.
That inflationary risk was confirmed when the Fed published yesterday that it now sees the most likely course of action as just one further cut this year. At any rate, the Fed maintained that it would be cautious until the inflationary impact of this commodity price spike is known. The Fed is accepting the inflationary risk of its government’s military actions and for a central bank to adjust so soon to macro events prompted markets to move to price a stronger US Dollar and softer treasury prices. The appointment of Kevin Wash as the successor to Jay Powell is also receiving significant attention and influencing any Fed-led trades. The Senate is presenting an obstacle to the appointment of Trump’s nominee whilst the DoJ is investigating Powell over his testimony regarding the Fed’s building ambitions under his tenure.
Discussion and Analysis by Charles Porter
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