Kish Pathak, Fixed Income Research Analyst & Erik Weisman, Chief Economist & Portfolio Manager of MFS Investment Management have shared their collective thoughts ahead of the Fed meeting.
The FOMC is all but certain to leave the federal funds target range unchanged at the June 17 meeting. The Fed is also likely to signal a neutral bias for monetary policy going forward.
Recent Fed speak has been hawkish on balance. For instance, Logan (Dallas Fed, voter) argued that policy was either loose, or neutral and inflation was not showing signs of reverting to the 2% target. She argued that hikes might be required later in the year. Hammack (Cleveland Fed, voter) also voiced concerns about persistently high inflation getting built into the mindset of consumers. Williams (NY Fed, voter) and Barr (FRB, voter) on the other hand presented a neutral assessment of current monetary policy setting.
It is conceivable that Warsh sounds dovish given his view on tech productivity. That said, we think this is a low probability outcome because delivering such a message right now will undermine his credentials as an inflation hawk. In addition, such a stance would fly in the face of his colleagues, many of whom have signalled their hawkish policy intentions in advance. Maintaining the easing bias in the statement could attract increasing dissents. This confrontational approach may undermine Warsh’s long-term change agenda which likely requires committee consensus.
The June meeting is slated to have projection materials. On March 18th, Chair Powell went out of the way to downplay the Statement of Economic (SEP) projections given the uncertainty related to the conflict. The war fog hasn’t cleared still. So, the SEP’s usefulness would have been questionable even if there was no leadership transition in play. But Warsh has been openly critical of the Fed’s models and forecasting approach. He may just shelve the SEP/dot plot altogether or announce a review of the process.
If there is an SEP, the message may remain one of “conflict dependency” of the economic outlook. The inflation forecasts will be revised higher because the consensus in March was for a relatively quick war resolution and reversal in oil prices. The oil shock is proving way more persistent than initially anticipated, and inflation risk is elevated because of easing financial conditions since then.
Warsh may scrap the press conference or reduce the frequency.The new Fed Chair has been critical of over communication. If he does hold the conference, he will face a barrage of questions about how he expects to steer the Fed in the direction he has indicated over the years. It is early days yet. The new Fed Chair may still be gauging the mood of the committee that he has to carry to deliver successful policy. He may not want to make any statements without first forging consensus within the Fed.
