Disagreement at the Fed

Estimated reading time: 5 minutes

A Fed Family Fight

Last month Federal Reserve Chairman Kevin Warsh said he would welcome a “good family fight” about monetary policy, and he got one. 

The Fed left interest rates unchanged this week, but three of the 12 voting members dissented in favor of a rate hike. 

Warsh’s second press conference as Fed chairman was somehow limited in its messaging while still carrying a lot of weight. Here are a few of my key takeaways from this meeting. 

The Target Is the Target

Warsh tried to dispel the myth that the Fed’s 2% inflation target is a soft target. Because inflation hasn’t fallen that low for many years, some people believe it’s only a loosely held target, but Warsh said there’s no tolerance for running above it. When asked which inflation metric the Fed compares to the target, he didn’t give a definitive answer. The chart below shows a number of inflation metrics… and none of them are at 2%.

Given the strong commitment he expressed, markets seem perplexed as to why the Fed didn’t hike rates. Our personal opinion is that holding rates steady was the right decision, but the messaging didn’t clearly outline why the Fed thought that was the right decision.

Forward Guidance Is Dead

Warsh made it clear again that the Fed will not be providing forward guidance. Warsh also acknowledged that part of what caused Treasury yield volatility since the last Fed meeting was the lack of forward guidance. In other words, he realizes that eliminating forward guidance is going to take some getting used to and markets need to learn to “play the ball, not the referee.”  (Historically, the Fed was the referee.)

We respect his ability to withstand market volatility in the short-term in the name of changing the Fed’s approach. The market, particularly the Treasury market, is not going to be so patient. 

In reaction to the Fed keeping rates unchanged, the 2-year Treasury yield fell signaling that the market was expecting a hike today and needed to readjust. But the 10-year and 30-year yield rose, signaling that inflation is still a concern and the market expects hikes in the future. 

The result was a steepening yield curve (the difference between short-term yields and long-term yields grew). In some respects, the rise in long-term yields tightens financial conditions by making capital more expensive. And in other respects it suggests that inflation expectations are moving higher, which is not what the Fed wants. 

This Fed meeting was a great example of how uncomfortable markets are with uncertainty. Removing forward guidance creates more uncertainty, and uncertainty creates volatility. In a way, a rate hike may have been embraced simply because it was a clear move. We think that would’ve been a foolish reaction, but markets are not always logical. 

We are now left to wait until the next Fed meeting on Sept. 16. The market sees the probability of a hike as greater than 50% right now, but things will likely change a lot between now and then.

Until a couple weeks ago, we were on the side of “no hikes in 2026,” but we are starting to believe that hikes are genuinely possible this year if inflation doesn’t show meaningful progress downward, and fast. As long as oil prices remain elevated and demand for AI outstrips supply, that’s not happening. We do not want any rate hikes, but we are warming up to it as a potential reality. 

Disclaimer
SoFi Securities (Hong Kong) Limited and its affiliates (SoFi HK) may post or share information and materials from time to time. They should not be regarded as an offer, solicitation, invitation, advice, recommendation to buy, sell or otherwise deal with any investment instrument or product in any jurisdictions. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
SoFi HK does not make any warranties about the completeness, reliability and accuracy of this information and will not be liable for any losses and/or damages in connection with the use of this information.
The information and materials may contain hyperlinks to other websites, we are not responsible for the content of any linked sites. The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi HK. These links are provided for informational purposes and should not be viewed as an endorsement. The risk involved in using such hyperlinks shall be borne by the visitor and subject to any Terms of Use applicable to such access and use.
Any product, logos, brands, and other trademarks or images featured are the property of their respective trademark holders. These trademark holders are not affiliated with SoFi HK or its Affiliates. These trademark holders do not sponsor or endorse SoFi HK or any of its articles.
Without prior written approval of SoFi HK, the information/materials shall not be amended, duplicated, photocopied, transmitted, circulated, distributed or published in any manner, or be used for commercial or public purposes.
Crypto and Crypto ETF products are available only to members in eligible jurisdictions who have successfully completed the required assessments and maintain an appropriate risk profile.
This communication is not directed at, and is not intended for distribution to or use by, any person in the United Kingdom. It does not constitute a financial promotion for the purposes of Section 21 of the Financial Services and Markets Act 2000. This material is not available to any UK Person. By accessing, viewing, or relying on this communication, you represent and warrant that you are not a UK Person and that you are not located in the United Kingdom.