The Fed meeting outcome will be here today

Outlook

FX trading activity was so skimpy yesterday we had to check if the data was updating properly.. This is a continuation of the day before, despite seemingly favorable news about the Iran war. Traders are skeptical. Uncertainties abound about the Iran deal and about whether Mr. Warsh will let any cats out of the bag today concerning changes he wants to make to the Fed. 

The Fed meeting outcome will be here later today. Warsh is a smart cookie and not likely to stir up any storms, let alone a tornado of argument. We know he may initiate talks on cutting down the Fed balance sheet. We know he wants to get rid of forward-looking stuff, including the dot-plot, but perhaps it’s will be a beginning of a discussion, not anything dramatic. He won’t try to muzzle members, who have the same right to free speech as anyone else. 

There is some musing about whether Warsh will put in his own dot to the dot-plot this time. Everyone is watching… The dot-plot is not a prediction nor a promise, as former Fed chair Powell said, and it’s often wrong. Conditions change, although some cling to the dot-plot as through it’s gospel and then complain when the Fed responds to that change. It fails, mostly, as “transparency,” but it’s better than total silence on the Fed’s general outlook.

The key point will not be the dot-plot (this time) but rather what Warsh says in the press briefing. He dislikes the Fed’s communications policies and wants the Fed to communicate less, including perhaps not holding a press briefing every time. Will he say that out loud? The press is girding its loins to force Warsh to say more than he wants said and we suspect his evasion tactics will be pointed out in lurid detail by tonight.

Jared Bernstein’s Substack on what to expect has this terrific tidbit: “Veteran Fed watchers are well aware that all of this talking, speechifying, and “forward guidance”—signaling to markets where they think things are headed—is relatively new, ramped up since the Ben Bernanke years.

“The approach definitely has its pluses. As Bernanke laid it out in 2003:

‘Ambiguity has its uses, but mostly in noncooperative games like poker,’ Bernanke told his Fed colleagues in 2003. ‘Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.’”

For what it’s worth, old-timers remember when we looked at money supply data to guess what the Fed would do. It was awful. The Fed may have been “oversharing” since Bernanke, but it’s better than total guessing. Then there’s the Greenspan remark forever engraved on Fed-watcher brains—“If you understood me, I must have misspoken.” He said that in a Congressional hearing, but still, that attitude stinks. 

Our take is that Warsh will assert Leadership in some form or another but just enough to outline a future and nothing to upset any apple carts, just shake ‘em up a bit. After all, he may feel he needs to offer some shiny thing to take attention away from the Fed not cutting rates as had been the pre-war outlook.

On another front, Bloomberg had a story on how the stock market tends to faint for the first three months of a new Fed chair. Oh, please. The stock market does care about the interest rate outlook, but no Fed chairman actually tells us in advance. A better way to forecast rates is to look at the data. Inflation is high and rising and has been over the Fed’s 2% target for 5 years, The chairman’s name on the door is irrelevant in the face of that.

We can also look at the Fed funds betting, which summarizes sentiment by folks willing to put cold, hard cash on the line. The CME FedWatch tool shows that even out to the Oct 28^th FOMC meeting, 62.4% are betting rates remain on hold. By the Dec 9^th meeting, 41.2% continue to think rates will remain the same. The others are the majority so foresee one or more hikes. No one see a cut.

Fed funds bettors are often wrong, but they do us the favor of changing their minds when the facts change. The CME graphics are dreadful but worth the watch.

Bottom line, Warsh will likely assert leadership in some fashion. One clear message might well be assertion of the Fed’s independence. He could, conceivably, hint that inflation is coming down now we have an Iran deal, plus the disinflationary effects of AI. We say that would be dangerous (but the stock market would love it). He will likely say he intends to make changes in the Fed’s communications policies, including the dot-plot, and/or the balance sheet. Warsh’s ability to tap-dance as well as Mr. Powell is in the mix, too. The world will be watching live TV at 2:30 pm ET today!

Forecast

Doubts about Iran remain. The big deal will be the re-opening of the Strait on Friday. If it does re-open, risk appetite can return.  The need for a safe-haven dollar dwindles. At the same time, the Israel issue is not going to be solved and the final peace deal in 60 days seems an improbability today.

This leads to a verdict of mostly range-trading for some time to come.