Kevin Warsh’s silence is like osmium, the densest element on the periodic table. The Federal Reserve governor has turned off the lights and imposed a thick secrecy over the institution’s next steps, a strategy that is weighing on investors.
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The Fed chairman proposed at the last board meeting to reduce the number of board meetings that decide on interest rates from eight to six, according to the minutes of the last Federal Open Market Committee (FOMC) meeting published this Wednesday. Warsh, in that attempt to reduce central bank communication, also suggested suspending some press conferences.
At the meeting on July 29, the Federal Reserve decided, by a majority of 9 to 3 votes, to keep interest rates unchanged in a range between 3.5% and 3.75%. “Many participants considered that a tightening of monetary policy would probably be necessary if inflation did not decrease,” the minutes state. Prices are not easing in the United States.
The Bureau of Labor Statistics calculated that prices rose 3.4% in July compared to the previous year, despite the sharp drop in energy prices due to the truce for a few weeks in the war against Iran.
“Some participants commented that current financial conditions might not be restrictive enough to facilitate a return of inflation to 2%,” the minutes say, reflecting growing concern about inflation, which has been above the Fed’s target for more than 65 months.
After the publication of the minutes, analysts consider there is a 65% chance that the Fed will keep interest rates as they are at the next September meeting, according to the FedWatch statistical tool.
The Fed chairman’s new strategy of eliminating forward guidance, the strategy that offered investors clues about the next steps, has increased financial market volatility. Public debt bonds are at multi-year highs, and the U.S. Treasury had to intervene this Wednesday to try to calm nerves. The department led by Scott Bessent announced it will double the pace of purchases of longer-term securities to try to inject liquidity into the system.
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Meanwhile, the new Federal Reserve leader’s strategy is not fully convincing investors. He resists giving markets clues about the next steps, but also does not fully explain the reaction function, as the policy the Fed would follow in certain situations is known. So analysts pay close attention to any hint of information, and the minutes of the Federal Reserve meetings gain more importance.
“Some participants who favored raising the target range for the federal funds rate at this meeting considered that doing so would probably help avoid the need for a sequence of more pronounced and potentially more costly tightening measures at a later stage,” the Fed minutes state, revealing growing pressure on Warsh to raise interest rates at the next meeting, despite low market expectations.
During the last FOMC meeting, Warsh reduced the scope of communication and repeatedly avoided answering journalists about his forecasts in a strategy to avoid giving clues that would commit the institution’s next steps and fall into a self-fulfilling prophecy. “Market participants are learning to play the game rather than focus on the referee, and market prices will continue to respond in the direction and magnitude they deem appropriate,” said the central banker born 56 years ago in Albany.
But the market poorly received the message of saying nothing and increased bond market volatility. Warsh believes he can manage markets with silence, or rather, with his commitment to do whatever it takes to lower inflation, but the governor has not yet earned the reputation his predecessors had, because it remains to be seen whether his rhetoric is part of a strategy to please U.S. President Donald Trump, who rejects higher rates, or if he is really buying time before acting.
“Several participants suggested that financial conditions had tightened during the period between meetings and that this development partly reflected strong economic growth and market expectations that the Committee would adopt a more restrictive monetary policy stance shortly,” the minutes describe, in a message that could serve as an alibi for Warsh.
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