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Chapter 1: What are the implications of Kevin Warsh's first remarks as Fed Chair?
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The most iconic week in the bond markets continues. A couple of days ago, we brought you some thoughts from the great and the good in bond markets on inflation, US credibility and all that jazz. Since then, it's finally happened. We had an interest rate decision from the US under the new chair of the central bank, Kevin Walsh.
It's always kind of exciting for sad people like us when there's a changing of the guard at a big central bank. But this switchover is kind of special for a bunch of reasons. Today on the show, may the wash be with you. What do we learn about the man who, after Rob Armstrong, is now the most powerful person in markets?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, back in the basement of FT Towers after I was let out for good behaviour earlier this week. I'm joined by the big fella, Rob Armstrong himself, over in Brooklyn, New York. Rob, and soon I'm going to see you in real life, no?
It's exciting. And I think it's important to note that this will be the rare occasion where we see each other in person and a massive hangover does not ensue. I think we can grow and change. And this is...
Yeah, I'm going to New York very briefly and you are not to take me to a bar and cause me to miss my flight home. So, the Fed decision earlier this week and the press conference from the new chair, Kevin Walsh, I missed this whole thing because I was doing an FT event and then I was watching the football. So... You were watching it all in real time, right? Give us the highlights.
I mean, the statement, the written statement was half of the usual length. So did that sort of brevity track through to the presser?
And this was one of the big questions coming in. Warsh has said in the past, he basically wants the Fed to communicate less. He wants to go back to the Federal Reserve tradition of Alan Greenspan, where there's not a lot of talking. Not a lot of sort of thinking out loud by either the chair or the other members of the open market committee. And the markets are kind of left to figure things out.
And, you know, one of the questions going in was like, what is the statement going to look like? And then the statement lands at two o'clock yesterday afternoon and it's half the length, like you say. Now, I don't think that is actually a particularly substantive change. In the sense of like, oh, we got all this information before we didn't get a lot of kind of empty verbiage was taken out.
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Chapter 2: How does Warsh's communication style differ from his predecessor?
It was pointing in the direction of taking a tough line on inflation, which all things equal implies higher interest rates, which is the opposite of what Trump has been talking about forever. Maybe you've been right all along, Rob. And, you know, Walsh has said, you know, yes, sir, no, sir, absolutely. I will cut interest rates to get the job or implied something of that flavor.
But once you're in the seat, you just do the job properly.
I hope that's true. I don't think we got conclusive evidence that that is true. It's not like Warsh ripped his applying for the job mask off, laughed maniacally and announced that rates were heading up. Right. But he did make that firm statement. Inflation is too high. That's our fault. Things are going to change around here and we're going to get it under control.
And he was backed up, by the way, by a committee. Everybody else did submit one of those dots that we talked about. So that that was the kind of double whammy hawkishness of this meeting. Warsh sending the it's our fault and we're going to fix it message and the committee going 50% in on a prediction of a rate increase this year.
Okay.
Yeah. I don't think that's quite conclusive. Certainly the market read this as very hawkish. The two-year treasury yield, which responds to expectations, market expectations for Fed policy. Gave a quite significant and dramatic leap after the meeting. But I don't think this performance as a hawk was totally convincing.
And I'll give you the most important example of why, which is his answer to an excellent question by our colleague Claire Jones, who is at the press conference representing the FT. And she asked the following extremely straightforward question. If inflation is too high and inflation is always a matter of bad monetary policy, why are you not at this meeting raising rates?
This is a tremendously straightforward question. And not about the future, by the way. And warsh. Pretend it was a question about the future. I can't answer that. We'll meet again in six weeks. No more four guns, but no. So now he's not answering questions about the present and the past too, right? That's the whole point. But she's not asking about the future.
She's asking about today. She's talking about the past.
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Chapter 3: What changes did Warsh make to the Fed's statement and what do they signify?
The process is incredibly transparent. It's as boring as possible. They like to just make sure this whole thing happens without ruffling the market. But again, you know, if Walsh were to ruffle the US government bond market, then we've all got a problem on our hands. It's not in his interest to do that.
I think this is going to be perhaps even more than increasing or decreasing interest rates. This might be the grand narrative of the beginning of his chairmanship, because we have a delicate financial situation in the United States where the government is running a huge deficit.
All those treasuries have to be that the country issues in order to pay for its deficit spending have to be bought by somebody. And if at the same time as that is happening, you're giving lots and lots of government paper the market to buy. If the Federal Reserve starts pushing government paper into the market at the same time, investors might start to choke on all this stuff.
And we've had moments that looked like that was happening before. And, you know, can we have a small balance sheet and a big government deficit at the same time and a stable market at the same time? People have described that as the Fed's trilemma. You can have nice, calm markets, you can have a small balance sheet, and you can have big deficits, but you can't have all three at once, you know?
And so how he juggles, how Warsh, as it were, keeps those three balls flying in the air is going to be one of the great narratives of this chairmanship.
Yeah, so the big narratives so far are make me virtuous but not yet, but also cut the comms, say less.
There may be some arcane rule in the Fed that describes this. But I don't think the Fed chair can make the regional heads of the Federal Reserve Banks, who are the people who are always making speeches about this or that and what they think about rates. Can he tell them to be quiet and sit in the corner? I don't think so. So it's a test of his leadership. I mean, he can shut himself up.
He sort of did that in the meeting yesterday. He did it by erasing his thought. But can he make other members of the Monetary Committee shut up? I don't really know. Can you make Jay Powell shut up? Is everybody going to play nice? I don't know.
Speaking of shutting up, let's do exactly that and come back in just one second with Long Short.
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