• No change in Fed Funds range: 3.5% to 3.75%
• Nine of 18 Committee members forecast 2026 rate hike
• Traders are betting on a quarter-point hike by January
• An “additional” fix – shifted to price stability away from jobs
• Bottom Line: Fed on hold; shifted focus from jobs to inflation

Meet the New Boss 

Chairman Warsh led his first FOMC meeting as Chair Tuesday and Wednesday. His recent speeches and testimony have three themes: 1) the FOMC should have less communication, 2) “Trimmed” inflation measures are more useful than traditional “headline” numbers and 3) since trimmed mean numbers are below 2.5%, the Fed should be cutting rates. We will touch on those in a moment.

In keeping with his desire for less communication, the Open Market Committee’s statement cut out four of the seven paragraphs from the prior release format. The statement’s opening line stated that the Committee voted 12-0 to hold the Fed Funds range at 3.5% to 3.75%.

The April statement put emphasis on the Iran vs. Everybody war as a reason for inflation. Today the statement acknowledged the situation in the Middle East creates “uncertainty” but did not blame it for inflation. The Committee did recognize that “productivity growth and capital investment are strong” and “the unemployment rate has changed little.”

The statement and Warsh in his press conference concluded with “The Committee will deliver price stability.” We take that to mean they will focus on inflation over jobs, unlike in the last several years. Warsh also emphasized that the FOMC remains committed to achieving 2% inflation.  

Additional win

At the April meeting, three regional bank presidents wanted to change the press release to remove the word “additional.” This forward guidance word has been in press releases for at least five previous meetings. The full sentence:

“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks.”

Since the last Fed rate action was a rate cut, the thinking was this word suggested more rate cuts on the way. Keeping with Warsh’s stated desire to lessen communications, the entire paragraph was struck. It also sends a signal that the Committee has moved to at least a neutral stance, now that half of the group is projecting a rate hike later in the year. 

What’s next?

Warsh announced the creation of five task forces to review Fed views and policies on: 1) Fed communications; 2) the Fed balance sheet & ample reserves; 3) use of and new ways to gather data; 4) productivity and jobs; 5) inflation frameworks. We are not sure what an inflation “framework” is, but we hope the Fed takes a hard look at the 2% inflation target. These task forces are to report back by this fall.

“Price stability” is the old economist reference to very little or no inflation — and inflation is, and will be, an ongoing problem. At a minimum, the long-term drivers are: 1) a shrinking workforce demanding higher wages, 2) global competition for energy and resources and 3) efforts to re-shore and reinforce supply chains. 

Summary

Warsh kept his word regarding a shorter press release and conference. We will soon find out if he is successful in persuading a majority of voters that trimmed mean inflation is the correct tool. Trimmed mean measures strip out high and low items each month. So volatile fuel prices have not figured into their calculation over the last several months. They do, however, get into our wallets each week at the pump.

We believe the Fed should stay on hold this year. The economy was doing well pre-Iran war and can still climb above 3% GDP growth. Nine of the 18 members forecast a rate increase later this year. We would welcome that if the economy was running above 4% and unemployment fell below 4%. We do not give those high odds.

Keeping rates on hold is the right move, and we think the economy can skirt the worst of the war effects and perform well this year.

Please let us know how we can help you. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on X here. 

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