Key Points
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New Fed Chair Kevin Warsh has been intentionally tight-lipped about where he thinks interest rates should go this year.
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However, if Warsh wanted to move forward with a rate hike this year, he may have the necessary votes on the Federal Open Market Committee.
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The Federal Open Market Committee’s (FOMC) July meeting has officially begun and will conclude on Wednesday, July 29, with a decision on interest rates, followed by a press conference with new Fed Chair Kevin Warsh.
It will only be Warsh’s second meeting as chair, but a lot has already happened in his tenure.
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Warsh has already begun to pull the Fed away from the stock market by making it clear he intends to provide much less forward guidance. Warsh has also created several new task forces to examine major potential changes in how the Fed conducts its business.
Already, the lack of forward guidance has put a portion of the market on edge. Will Warsh shock investors tomorrow with a surprise rate hike?
Official White House photo by Daniel Torok.
The market sees a chance
According to CME Group’s FedWatch tool, which uses 30-day futures to track the likelihood of changes to the Fed’s benchmark lending rate, the federal funds rate, there is a 68.5% the Fed leaves rates unchanged, as of this writing.
That leaves a 31.5% chance the Fed hikes rates by a quarter point, within a range of 3.75% to 4%.
On Kalshi, 76% of people betting on the Fed’s July rate decision expect the Fed to hold rates steady, while roughly a quarter see a hike. Keep in mind that these probabilities in FedWatch and Kalshi change frequently.
Now, the FOMC has 12 voting members, so Warsh can’t make a decision on his own, but other FOMC members do appear to favor such a move.
Lorie Logan, president of the Federal Reserve Bank of Dallas, has publicly said she thinks a rate hike at the July meeting would be prudent. Cleveland Fed President Beth Hammack has also indicated that she believes inflation is too high.
US Consumer Price Index MoM data by YCharts
In mid July, Bank of America Senior Economist Stephen Juneau said in a research note that he thinks Warsh would be able to drum up the necessary votes on the FOMC to move forward with a rate hike if he wanted to.
Very recently, Frank Flight, the head of macro strategy at Citadel Securities, said in a research note, “The market may once again be underestimating the extent of the hawkish shift at the Fed.”
Flight also noted that Warsh could use a July hike to “… emphatically end the forward guidance era” and also show he is committed to Fed independence.
Will Warsh actually make a move?
Despite potentially having the votes on the FOMC, I still find it very unlikely that Warsh pushes a quarter-point rate hike through this week.
For one, the FOMC at Warsh’s first meeting as chair held rates steady in June, just days after data showed that headline inflation in May spiked to 4.2%, the highest level seen in three years.
While this isn’t the only data point important for inflation, it would seem an odd move for the Fed to hike rates now, given that inflation in June slowed and showed a reprieve beyond energy prices.
Additionally, a rate hike, with midterm elections looming, would surely put Warsh in the crosshairs of President Donald Trump, who has advocated for the Fed to cut rates since his second term began.
Finally, there’s still a chance that the U.S. and Iran reach some kind of longer-term ceasefire or peace agreement that brings oil and gas prices down. The Fed won’t want to move too hastily because the longer interest rates remain elevated, the higher the chance of a recession.
While rate hikes are certainly possible later this year, I see no need for the Fed to move forward with one now.
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Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
