On Wednesday the Federal Open Market Committee of the Federal Reserve released an unexpected announcement that US interest rates would remain in the same target range, between 3.50 and 3.75 percent, a move that reflects the high rate of inflation, 4.2 percent - the highest rate since April of 2023. Add to that the recent May jobs report of 172,000 jobs, the die was cast for stasis.
"Inflation remains elevated relative to the Committee's 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy," the FOMC said.
Significantly, this was also the first report under the new Fed Chair, Kevin Warsh, who was nominated by President Trump as a direct move to cut interest rates, (which the former chair Jerome Powell refused to do using standard macroeconomic metrics), so Wednesday also brought a closer look at Warsh, who has changed both the tone of his post meeting remarks; and, has diluted the predictive “dot plot” which previously has shown possible future Fed actions: but that’s not all, Warsh also has created several task force committees that seem a generation away from his baby boomer predecessor.
Another significant change was that there was almost near unanimous support for the stasis, and even with some members diverging in how much of an increase, it reflects a recognition of the economic reality of the world’s largest economy, and its reaction to what, and how the Fed manages their dual mandate of full employment and inflation at 2 percent, a standard that Warsh seems to have drifted away from in his later remarks.
Of course, the elephant in the room is the Memorandum of Understanding between the US and Iran to end the war that has affected, or sustained the costs of energy prices. With that in mind, Monday’s news that Iran would open the Strait of Hormuz has eased the price of regular gasoline prices down by 50 cents per gallon, but still a dollar higher than it was before the war began in February.
Trump was under a great deal of pressure to get the Strait open before energy prices rose even further, and to calm the stock markets, at least for the time being; with critics noting that Iran has a powerful tool in the future, should there be greater pressure from the US or Israel. But, for the time being it seems to be smooth sailing.
Setting sail in a new direction is Warsh, and CBS News reported that, “The so-called easing bias — a sentence in recent FOMC policy statements signaling the central bank was leaning toward cutting interest rates — was removed from the June guidance, which was significantly slimmer than the typical statement.”
"You might have already noticed something, a difference in today's policy statement," Federal Reserve Chairman Kevin Warsh said in a press conference to discuss the Fed's latest interest rate decision. "It's a bit shorter, a bit simpler and it dispenses with some older language. That statement just gives you the facts as best we can judge it."
This will be a closely watched feature at future meetings and also under examination are “what economists expect to be a major shift in the Fed's communication practices, including the aforementioned circumspect policy statements and lesser forward guidance.
That said, the new task forces are causing scrutiny to review how it handles or assesses “issues ranging from communications to inflation data,” but some analysts and economists are wondering what exactly those words will mean in the future and if there is a political message emanating from the White House.
It may be too early to tell, but with as with all current political events, and remarks, hinging on the November midterms for Republicans to keep their majority, we have this from Warsh: "If I saw somebody in the grocery store, what I would say to them is that we cannot have a very significant effect on particular prices, the price of oil in the markets today, or even the price of a dozen eggs," and Warsh continued."But it's to make sure that those changes in oil or beef or eggs or milk don't broaden in the economy, don't have second and third effects,” adding that, "We're going to deliver on it."
If Warsh is going to work with the White House, as expected, then that will be a tough slog with nearly 80 percent of Americans disapproving of Trump’s handling of the economy.
Returning to that statement, without uncertainty, or even affordability, the stated goals for these task forces are “addressing the Fed’s communications, its balance sheet, its reliance on data sources, productivity and jobs, and the central bank’s inflation “frameworks.”
As anyone who follows Washington knows, the creation of white papers, task forces, and committees can be a place where legislation goes to die, so observers are wondering what will be the result of these goals.
Speculation is often the bulwark of Washington, and with the possibility of the evaporating “dot plots”, it runs rampant, so we have this from The New York Times:
“The dot plot had fewer entries than usual. Mr. Warsh confirmed he was the only official who did not submit any projections, while another policymaker opted against submitting projections just for 2028. Mr. Warsh has argued that Fed officials should speak less frequently and forgo providing specific guidance about where rates may be headed in the near term to avoid limiting their ability to pivot if the economic backdrop changes.”
An analysis of the possible meanings of this are wondering if this is a case of being quiet and carrying a big stick? Is the stick coming from the White House?”
In one of his atypical comments the president did say, in contrast to an earlier Oval Office statement when the new inflation report was released, "I love it. The numbers were great. You know what I really love? I love the inflation," but when asked about the Fed’s decision to maintain interest rates, President Trump told reporters, “It’s alright, whatever.”
“Trump later expounded a bit more, when queried about the prospect of a rate hike soon. “It could happen. It’s hard to believe. It just keeps our country down. It’s so unusual.”
“But in a sign of a changed tone on the part of the president, he then said this of Warsh: “We have a very good guy over there now, so I’m guided by what he wants to do.”
The Times did expand on what an interpretation might be noting, “Rising inflation and a steady policy rate translate to a lower inflation-adjusted or “real” interest rate, meaning the Fed is not restraining the economy as much as it once was. That risks making the Fed’s inflation problem even worse, especially at a time when the labor market has strengthened and the economy more broadly is holding up well.”
With several factors looming on the horizon, ending a war, rising inflation, a resilient American jobs market and political maelstroms, plus a central bank possibly beholden to the executive, it’s a very long road ahead for price control, and even harder for working American families.
No comments:
Post a Comment