FOMC: Uncomfortable hold fails to convince markets by Emkay Global Financial Services Ltd
FOMC : Uncomfortable hold fails to convince markets
* The Fed kept its policy rate unchanged at 3.5-3.75%, despite expectations of a hike (market pricing for a hike at ~33% before the meeting). However, there were three dissents the most since Sep-16 (by Kashkari, Hammack, and Logan) in favor of a 25bps hike, as Chair Warsh eventually witnessed the "family fight" he sought
* The statement was largely unchanged from the previous meeting, acknowledging solid economic activity alongside strong investment and productivity growth. It also reiterated the FOMC's intent to deliver price stability, emphasizing that the Fed under Warsh will be laser-focused on bringing down inflation
* Warsh reiterated such focus in the press conference ("we will deliver price stability") and, interestingly, welcomed the rise in Treasury yields since the last meeting as a sign that "market participants are learning to play the ball, not the referee", ie reacting to economic developments and not 'Fedspeak'. Given Warsh's preference for less communication from the Fed, it is likely that volatility in markets will rise around FOMC meetings under his tenure. This will also be influenced by the complete lack of forward guidance, which is likely to be the norm in Warsh's Fed
* Market reaction: The US yield curve bear-steepened: (2Y: down 4bps; 10Y: up 7bps; 30Y: up 12bps), as markets called Warsh's inflation-fighting credentials into question. The S&P500 dropped 1.5%, while the DXY dropped 0.6%. Market pricing for a hike in September stands at 57%, with one by December at ~85%
* This hawkish Fed hold, combined with rising internal support (and market expectations) for further tightening, is likely to keep US yields higher (especially with renewed Middle East hostilities). The DXY is also likely to remain firm going ahead which reduces the scope for a sustained EMFX rally, especially if Middle East tensions and oil prices remain elevated
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