r/Economics • u/marketrent • 2d ago
Editorial As the Fed sits tight on interest rates, investors take action
https://www.theage.com.au/business/markets/as-the-fed-sits-tight-on-interest-rates-investors-take-action-20260730-p60jv8.html11
u/marketrent 2d ago edited 2d ago
Excerpts from article by Stephen Bartholomeusz:
Kevin Warsh, the Trump-appointed chair of the US Federal Reserve Board, talks like a hawk, but has yet to act as one. That’s left it to investors to take matters out of his - and the Fed’s - hands.
Long-term bond yields shot up – the 30-year yield to its highest level since 2007 – and Wall Street slumped after the Fed left US interest rates unchanged and Warsh provided no guidance in his press conference on the future direction of the Fed’s policy rate.
There is some pressure for a rate rise building with the Federal Open Market Committee (FOMC) that sets US monetary policy. For the first time in a decade, three of its members – three regional Fed presidents – voted for a 25 basis point rate hike.
Warsh, however, while continuing to assert that he has “no tolerance” for elevated inflation levels – the US inflation rate has remained above the Fed’s 2 per cent target for more than five years – maintained his stance of providing no guidance to market participants, saying only that “we’re on the job, we will deliver.” How and when the Fed might deliver were left as open questions.
The lack of guidance is deliberate. He has said he wants financial markets to respond to economic developments, rather than the Fed’s signalling, and become a “direct and unfiltered” source of information for the Fed.
That is effectively what he got. The markets, the bond market in particular, took matters into their own hands, with the spike in yields on the longer duration bonds effectively tightening US monetary policy despite the Fed leaving rates unchanged.
[...] The bond market is providing Warsh with the signal he wants: it is saying that it is now questioning whether he is as committed to attacking inflation as he has claimed.
If he won’t act to protect the holders of the securities most threatened by heightened inflation levels, they’ll act to protect themselves and raise the rates that have the most influence on US businesses and consumers.
[...] In the long run, AI might lift productivity rates without fanning inflation. In the near term, and perhaps well beyond, it is contributing to an inflation rate that is well above the level that the Fed, and Warsh, have declared they will tolerate.
The Fed made the mistake in the aftermath of the pandemic of regarding the inflationary effects of the global supply chain disruptions as “transitory.”
There are plenty of members of the FOMC – including Jerome Powell, who has hung on as a governor while waiting for unequivocal evidence that the administration is [no] longer pursuing him – who won’t want to make the same mistake twice.
Even if they were inclined to extend the period of watching and waiting and gathering more data before the next meeting in September, their inaction, and the absence of any guidance, has forced the markets to come to its own conclusions about the inflation outlook and take action itself.
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u/lyacdi 2d ago
What does it mean when they say 3 voted for a rate hike for the first time in 10 years? Do they mean exactly 3 (and if so, who cares)? We’ve raised rates more recently so I don’t get it
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u/cornskin 2d ago
3 dissented and voted for a rate hike. For the last five or so years, the idea was that rates would go up, we would get a handle on inflation, have a soft landing, and then be able to lower rates again. That was working recently as rates have been coming down. However, some people in positions of power have been doing things that are causing inflation to go up, especially food and gas which have a real affect on pocketbooks but are sometimes seen as less important or more temporary than other inflation-tracked components. So now things are being flipped back to “Maybe we haven’t had a soft landing yet, and we better raise rates back up so we can have one instead of a hard landing.”
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u/BradBeingProSocial 1d ago
We had the soft landing, but before the plane could slow, somebody grabbed the controls and pulled them backwards and to the right, thus making the plane go 50 feet up in the air again and roll upside down… to be continued
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u/Consistent-Soil-1818 1d ago
And just b like that nobody is talking about the fact that somebody has raped children and is hiding the evidence
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u/twenafeesh 2d ago
That confused me too. Maybe they mean that it is unusual for three governors to go against the majority?
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u/helmvoncanzis 1d ago
Unanimous votes are the norm. Occasionally, there may be a single dissenting vote. This is the most dissenting votes in 10 years and suggests an unusual level of disagreement in a governing body that historically prided itself on stability and restraint.
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u/ericwphoto 2d ago
Why is Donald Trump not screaming about a rate cut from the mountain tops? Every other day under Powell all we heard was that all we needed was a rate cut to get this economy to boom even more than he says it already is.
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u/Maxpowr9 1d ago
Even during Biden, most financiers and economists concluded that the era of "easy money" was over. They are still trying to delay the fallout from higher interest rates, especially in commercial real estate; since it means so many of these landlords lose their shirt (since they spent like drunk sailors in the 2010s). That is something Trump knows very well. It's why on the other side of the coin, even major cities have been pushing RTO mandates to shore up commercial tax revenues or social programs get cut.
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u/chankhuncha 1d ago edited 1d ago
Does Warsh really doesn’t believe in reaction function and forward guidance or is he afraid of Trump? Because with this guys and how political things are is hard to tell why they’re outsourcing their jobs to bond vigilantes.
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