Fed review Hold now, but dissents

Fed review: Hold now, but dissents leave a September hike on the table Marketing communication

The Fed held at 3.50–3.75%, but three members dissented in favour of a hike. Unlike June, this hold was not unanimous. Going into the meeting, markets put the odds of a hike at around one in three. In the event, the Fed held the target range at 3.50–3.75%. But the vote was 9–3, with Beth Hammack, Lorie Logan and Neel Kashkari all preferring a 25bp hike at this meeting. These are the first dissents of Warsh's chairmanship, and all three are in the hawkish direction. The hold is a good deal less comfortable than the June one.

With no new projections at this meeting, the signal had to come from the statement and the press conference. On the statement, the question was whether any of the key lines had moved. They had not. It is more or less unchanged from June: job gains have "kept pace with the workforce," the unemployment rate "has changed little," and activity is still "expanding at a solid pace." On inflation, the Committee repeats that price growth "remains elevated relative to the Committee's 2 percent goal," and closes again with "The Committee will deliver price stability."

That left the press conference, and it gave little more away. Warsh was clear enough on the balance of the mandate — the Fed is doing well on employment, "but we're doing considerably less well on prices" — which sits comfortably with three dissents. Beyond that he oered no steer on the path ahead, and seemed content that way. Asked about communication, he said he "was comforted that markets weren't reacting to us, they appear more than ever to be reacting to real time events." On the dissents themselves he was untroubled: "I asked for a good family fight, and I got one. That's the purpose." And he gave short shrift to the idea that June's softer inflation print changes the picture, saying that five-plus years of above-target inflation cannot be cured in nine weeks, or by a single month of modest price decreases.

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Markets, for their part, drew their own conclusions. The 30-year US government bond rate climbed 10bp to its highest level since 2007, while the 2-year US government bond rate edged modestly lower. That combination is worth pausing on. The front end says markets have pared back their expectations for further hikes, despite the three dissents. But if the Fed is expected to do less now, and the long end is moving the other way, the implication is that investors are less confident inflation will be brought under control. It is too early to conclude that markets do not trust Fed to deliver. But the reaction suggests a degree of scepticism, particularly as the US dollar weakened while the 30-year US government bond rate moved higher.

With the statement essentially unchanged and Warsh giving little away, the meeting oered limited insight into the Committee's thinking or the chair's own. That leaves the vote as the clearest signal on oer. Three dissents, all in the same direction, tell us where this Committee is heading. We continue to look for a hike in September.

corporate.nordea.com/article/104176/fed-review-hold-now-but-dissents-leave-a-september-hike-on-the- table