(Kitco News) – After the Federal Reserve held rates unchanged as expected, Fed Chair Kevin Warsh used his second press conference to address the reemergence of dissent on monetary policy, the challenges of parsing economic shocks, and the need to adapt to life after forward guidance, while reiterating his commitment to the 2% inflation target and post-FOMC pressers – at least through 2026.
Warsh’s opening remarks called for patience from the markets, businesses, and the public.
“We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks or by a single month of modest price decreases,” he said. “This Fed will not waver. Our credibility rests on performing our duties and delivering on our responsibilities. Americans are right to expect that because our nation's prosperity depends on it.”
Warsh pointed to two key economic developments that occurred since the last Fed meeting.
“Nominal and real yields are materially higher across the Treasury curve,” he said. “In the intervening period, market attention centered on real data and real economic developments. Prices reacted in real time to incoming information, and the reduction in forward guidance may have been a factor.”
“Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit,” he said. “This is, in my view, a change for the better, and we're just getting started.”
The second key economic development Warsh pointed to is the strength of U.S. business investment.
“The surge in high-tech CapEx has been remarkable, but that does not necessarily make the Fed's role any easier,” he said. “In the AI-related category of high-tech equipment and software, the most recent data shows four-quarter growth rates of nearly 20%. This is helping to sustain the healthy momentum of manufacturing output. More generally, CapEx is preparing the ground for future growth.”
Warsh said FOMC discussions centered on four questions: The impact of five years of above-target inflation on the present situation; the economic shocks of recent years; the price increases arising from these shocks; and monetary policy tools and strategies to achieve stable prices.
During the question-and-answer session with reporters, the Fed Chair said the FOMC was trying to get “an unfiltered message from markets.”
"We've seen material tightening not just in nominal rates but in real rates too,” he said. “We're observing it, we're trying to stay out of that, because while many of you might be interested in our reaction function, we're interested in the reaction of financial markets."
Not surprisingly, several questions focused on the dissenting votes of Beth Hammack, Neel Kashkari, and Lorie Logan, all of whom supported a quarter-point rise in the federal funds rate at this meeting.
“I asked for a good family fight, and I got one,” he said, but added that while there were three dissenters, "there was a large majority support for the decision that we made."
Warsh acknowledged that people could validly draw different conclusions than the majority vote, “but my own judgment is this is a period of watchful thinking, not watchful waiting, and I think the score on that vote was unanimous.”
The Fed Chair also addressed the various economic shocks, including tariffs, the Iran conflict, and the lingering effects of Covid, and their impacts on the central bank’s work.
“A lot of our focus was on trying to understand and identify underlying inflation dynamics amid shocks,” he said. “We take these shocks seriously... We're not looking through them.”
“I'll be the first to admit the shocks make this job and this policy conjuncture a little tougher,” he added.
On the question of whether the Fed had softened its position on the viability of the inflation target, Warsh was emphatic: “We will deliver the 2% inflation target,” he said. “That is the Committee's definition of price stability.”
The Fed Chair also conceded that there would necessarily be a period of adjustment for markets to the reduction in forward guidance.
“I take seriously that the pullback of forward guidance requires some transition,” he said. “Reform isn't easy, but our general judgment is going to help us make better decisions.”
He also chided reporters for their dogged efforts to squeeze that guidance out of him. “When some people that follow the Fed say, 'well, we don't want your forecast, we just want your reaction function,’ part of me, what I hear is, ‘what we really want is your forecast, what we really want is your dot.’”
On the rise in Treasury yields that occurred since the last Fed meeting, Warsh seemed satisfied that the market was taking its cues from the data rather than waiting on his direction. “We don't endorse any particular market move, but I'd also suggest we observe them with keen interest,” he said.
Addressing the transmission mechanisms of the Fed’s monetary policy, Warsh said “the interest rates work through lending channels and credit channels, maybe confidence channels and foreign exchange, while the balance sheet “probably works through some other channels like signaling and portfolio balance.”
Asked about his upcoming Jackson Hole speech in August, Warsh was noncommittal. “I look at it like a blank piece of paper right now,” he said. “I have not begun consideration with the incredible team here what would go into that document… I haven't made a decision whether it's going to be a big-picture speech, or whether it's going to be a more traditional set-up for all of the action we're going to have between September and December.”
He added that “between now and Jackson Hole... I'm checking with the task forces.”
Looking ahead, Warsh was also asked if he worried about surprising markets at the next meeting, as they were clearly pricing in a September hike. “We're not going to be constrained by market prices,” he said. “We're not going to be constrained or take verbatim from what the market is doing.”
Warsh concluded by committing to holding post-FOMC press conferences between now and year-end, but left open the possibility that the Fed might choose to hold press conferences only if they believe the news warrants them.
