By Andrew Moran
Contributing Writer
The Federal Reserve left interest rates unchanged for the fifth straight meeting on Wednesday.
Nine members of the Federal Open Market Committee — also known as the FOMC — agreed to leave the chief policy rate in the current target range of 3.5% to 3.75%.
Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan dissented and preferred to raise the federal funds rate by a quarter point.
“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the post-meeting statement said.
Inflation continues to be above the central bank’s 2% target, “reflecting supply shocks that have driven price increases in certain sectors, including energy.”
“The committee will deliver price stability,” it said.
It was once again a short statement, coming in below 200 words for the second consecutive meeting.
June’s inflation data came in better than expected amid stabilizing global energy markets. With the reacceleration in oil and gas prices, the July and possibly August numbers may not fuel optimism that inflation is decelerating and returning to pre-war levels.
The Fed’s playbook suggests monetary policymakers look through oil supply shocks and concentrate on underlying inflation trends.
Minutes from June’s policy meeting indicated that tighter monetary policy would be appropriate.
“Many other participants, however, assessed that the appropriate level of the federal funds rate would be above the current target range at the end of this year,” the meeting summary stated. “Participants noted that their future policy actions would depend on incoming information.”
Core inflation, which strips out volatile energy and food categories, has been tamer. For example, the 12-month headline consumer inflation rate is firmly above 3%, but core is at 2.6%.
A fresh batch of June’s inflation figures will be released on Wednesday: the Fed’s preferred Personal Consumption Expenditures Price Index for June and trimmed-mean PCE.
Fed officials place more weight on PCE than the Consumer Price Index because the former is more detailed and is updated more frequently. The new central bank leader has recommended trimmed inflation as a possible yardstick since it removes outliers, whether a spike in crude oil prices or a collapse in egg prices.
Investors have made an interest rate hike their base-case scenario, pointing to Warsh’s “no tolerance” stance on inflation and elevated inflation readings.
“If you take Fed Chair Kevin Warsh’s recent comments at face value, they could arguably be interpreted as consistent with a hike,” Christian Hoffmann, head of fixed income and portfolio manager at Thornburg Investment Management, said in an emailed statement.
“There appears to be a growing debate around how much weight to put on one good inflation report versus longer-term inflation risks.”
Futures markets widely anticipate a quarter-point rate hike in September, according to the latest CME FedWatch data. Yields on U.S. Treasury securities have sharply risen as well.
The two-year yield, which tracks Fed policy expectations, is above 4.3%. This suggests traders are bracing for at least two rate hikes over the coming months.
In addition to the policy rate, the results of the Fed’s new five monetary task forces will also lurk in the background.
“There are risks around strong policy directives before the task forces have had a chance to do their work,” he added.
Monetary Task Forces
Warsh announced in June that he established these panels to examine several areas, including communications, inflation and the balance sheet.
What the five monetary task forces report will be key for financial markets moving forward.
The outside experts’ recommendations could describe a Fed that might do considerably less than it does today, “and do its core job better as a result,” says Jai Kedia, a research fellow at the Cato Institute’s Center for Monetary and Financial Alternatives.
“No one should expect the Fed to ever deliver perfect macroeconomic outcomes — that requires a privatized monetary system and is not possible under our centralized fiat currency regime,” Kedia wrote in a Tuesday paper.
Reforms that feature greater transparency, a smaller balance sheet, and better data would facilitate a more predictable and accountable institution, he added.
“Each reform stands on its own, yet each advances the same principle: A central bank that interferes least with private decisions, and operates by clear and stable rules rather than by discretion, serves the public best,” he said.
The panelists include former Bank of England Governor Mervyn King, former Walmart CEO Doug McMillon, former White House economist Greg Mankiw, and prominent venture capitalist Marc Andreessen.
The final reports are expected to be published by December.
