Entrenched inflation – what it means for Fed policy and Treasury yields

Despite pressure from Trump, it is highly unlikely that the Fed will change policy at this meeting given the high inflation-low unemployment backdrop. Nonetheless, it is an important meeting and there are several things to look out for:

• The post-FOMC press conference will be more interesting than normal. There will likely be close attention paid to Warsh’s messaging on how he views the economy and any signals regarding the future path of rates and the Fed’s balance sheet. Furthermore, given that Warsh has stated his preference for less Fed communication, this will be tested by how he responds to questioning from the media. Although Warsh is highly educated and a former Fed governor, the desire to communicate less may be related to the fact that he is not a trained economist, so he may feel uncomfortable being questioned by journalists who are experienced in the field of US monetary policy.

• The FOMC Chair does not decide policy unilaterally. The FOMC sets policy by voting and the votes are released as part of the accompanying statement. The last FOMC meeting was unusual because there were four members who voted against the majority. Historically, it has been very rare for more than three FOMC members to dissent – the last time that happened was under the Greenspan Fed on 6 October 1992. However, we may be entering a new era in which it is normal for there to be a greater diversity of opinion expressed by FOMC members. This would lead to greater uncertainty regarding the outcome of FOMC meetings, something that would be magnified further if the Fed reduced the frequency and scope of its communications.

• At alternate FOMC meetings, the Fed releases a Summary of Economic Projections (SEPs), including the infamous dot-plots showing the expected path of the fed funds rate over the subsequent few years. This meeting will be accompanied by an updated SEP document. It has the potential to be even more impactful than normal given the change in leadership, the change in composition in the FOMC and inflation that is stubbornly above target. If any members wish to signal their independence, this is one way in which they could do so anonymously. Look out for any notable changes in the range of forecasts, in particular with regard to the anticipated fed funds rate.

In summary, the June FOMC meeting will be notable not because of the decisions taken, but more for the nuances associated with the accompanying messaging and forecasts. This will allow markets to start to consider what the Warsh Fed will look like in the months and years to come.

¹ See for example: https://www.businessinsider.com/fed-powell-faces-market-volatility-at-start-of-tenure-as-chair-2018-2 and https://www.investing.com/analysis/the-market-does-have-history-of-testing-new-fed-chairs-200680884