Kevin Warsh kicks off era as Fed chief with a rate hold and a makeover

Kevin Warsh's first FOMC meeting as Fed chair ended where markets expected: rates on hold at 3.5%-3.75%, the fourth consecutive meeting without a move. What markets certainly did not expect: A massive overhaul of the way Fed delivers news of its interest rate decision every six weeks and how it communicates with the public.

The statement was the first signal. The FOMC released a noticeably shorter statement than it has in the past — removing what Warsh called “outdated language” and eliminating forward guidance entirely. The statement, instead, was boiled down to three paragraphs essentially saying: economic activity is expanding at a solid pace, inflation remains elevated partly due to energy supply shocks from the Middle East conflict, and the committee will deliver price stability. It contained no signals for what the Fed might do next.

Sitting out the dot plot: Nine of the 18 FOMC participants projected the federal funds rate ending 2026 above its current range — implying at least one hike — and the dot plot appeared to be missing one submission. Warsh confirmed it was his, and hinted there might be a whole new framework for the Fed’s public communications by the end of the year.

Warsh said there would be five task forces — covering the Fed's communications, its balance sheet, its reliance on existing data sources, productivity and jobs, and its inflation framework — most of which he hopes will conclude by fall or year-end. Everything is on the table: the dot plot, the quarterly Summary of Economic Projections, FOMC meeting minutes and transcripts, even the post-meeting press conference. Warsh signalled he may hold fewer of those too: “When you have one, you want to make sure you have something important to say,” he was quoted as saying.

His argument: When financial markets simply reflect back what the Fed has said, the Fed loses its most important source of information. He wants markets watching data, not watching the Fed watching data.

Markets did not love any of this. The S&P 500 closed down 1.2% and the Nasdaq fell 1.3%. The 10-year Treasury yield shot to nearly 4.5%. Traders were also pricing better than a 90% chance of a rate hike by October, with many pricing in a hike as soon as September.

MARKETS THIS MORNING-

Asian markets are mixed this morning, with Japan’s Nikkei jumping to a fresh record while Hong Kong’s Hang Seng fell, and mainland China’s CSI 300 was flat. Wall Street futures, meanwhile, are on the rise as traders digest the outcome of the FOMC yesterday.

THE CLOSING BELL-

The DFM rose 1.0% yesterday on turnover of AED 1.5 bn. The index is up 1.1% YTD.

In the green: Al Firdous Holdings (+14.8%), Agility The Public Warehousing Company (+11.9%), and Ekttitab Holding Company (+8.9%).

In the red: Al Salam Sudan (-1.7%), Emirates Reem Investments Company (-1.5%), and Islamic Arab Ins. Company (-1.2%).

Over on the ADX, the index rose 0.3% on turnover of AED 1.7 bn. Meanwhile, Nasdaq Dubai was up 1.7%.