The July meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) ended with a 9-3 decision to leave interest rates unchanged. Here is a copy of the press release issued following the meeting, which explains how they arrived at their decision:
“The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.”
A transcript of Chairman Kevin Warsh’s news conference may be read HERE.
That news conference included Mr. Warsh’s initial remarks and the following questions and answers.
It was not so long ago that heated public arguments between President Trump and former FED Chairman Jerome Powell revolved around the issue of interest rates. Trump wanted rate reductions and Powell refused to go along and chose to react to the data instead.
Apparently, the situation has changed enough that the idea of a rate reduction was not seriously considered. The three members of the FOMC that dissented all voted for an increase in interest rates. This indicates the possibility of stronger pressure for rate increases as we approach 2027.
It should be noted that the high inflation rates that we are experiencing currently are substantially the result of higher energy costs generated by war-related interruptions in oil supplies. The end of hostilities is likely to have a much greater effect on inflation than any amount of rate increases.
The July meeting of the FOMC is the second one presided over by the new Chairman, Kevin Marsh. Mr. Warsh is in the process of implementing two significant changes in the way the FOMC does business. They are the abolition of the dot plot predictions and the establishment of task forces.
DOT PLOTS:
A dot plot is type of scatter graph whereby data points are represented by dots on a graph. As used by the FED since 2009, each dot represents the interest rate prediction of each member of the committee. A cluster of dots indicates a high degree of agreement on when interest rates change, by how much, and in which direction. Market participants have relied on this visual communication tool to gauge policy shifts and adjust equity, bond, and foreign exchange allocations accordingly.
The problem with dependance on dot plots, and a good reason to eliminate them, as stated by market analysts at FXVExx, is this:
“The dot plot creates false precision and market confusion. When 19 Fed officials submit 19 different rate projections, markets have historically overinterpreted small shifts as policy tightening or easing signals. Data from Goldman Sachs research shows that 67% of equity volatility spikes around FOMC meetings correlate directly to dot plot revisions, not actual policy changes.”
TASK FORCES:
Kevin Warsh created five Federal Reserve task forces to rethink parts of how the central bank sets policy. They include communications, data, the balance sheet, productivity and jobs, and the framework for viewing inflation.
These task forces are populated by small panels of outside economists and business leaders. Their function according to Warsh is:
“The panels will operate independently, with a mandate to follow the evidence, provide candid feedback, and produce rigorous findings that will be reported back to officials on the Federal Open Market Committee.”
The inflation numbers for July are scheduled to be released August 12
The next FOMC meeting is scheduled for September 15-16
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