Kevin Warsh's first meeting in the chair at the Federal Reserve (Fed) was, on the face of it, a non-event. Interest rates were held at 3.50%–3.75%, exactly as everyone expected, leaving them unchanged for a sixth straight month. No surprise in the decision itself. The interest lay entirely in what the new chairman chose not to do.
Warsh declined to submit his own ‘dot’ to the Fed's famous dot plot. This maps where each of the committee’s 19 members thinks rates are heading. He encouraged his colleagues to carry on but pointedly kept his own forecast to himself. He slimmed the post-meeting statement to around 130 words, down from the 300-plus that investors had grown used to combing through line by line.
He also announced five task forces to review everything from communications to the balance sheet to the Fed's inflation framework.
The message, delivered with real firmness on the commitment to price stability, was that this is a Fed that intends to say less and let the data do more of the talking.
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Why the Fed’s dot plot has lost credibility
I think there is a serious case to be made for this new approach, the case for less.
Start with the dot plot, which attracts rather more reverence than its record deserves. It offers a snapshot of where the committee's thinking sits, and yes, for some that has some value.
However, as a forecast it has been poor. Through the long years of ultra-low rates, the dots cheerfully projected hikes that simply never arrived, year after year – if investors had felt they should price them in, they were repeatedly left wrong-footed.
A tool that anchors expectations to a path the Fed itself keeps missing is perhaps of questionable value. The Fed is an outlier on providing these 19 individual dots. Most other major central banks publish inflation and growth forecasts.
None of this made him dovish. Quite the reverse.
In central-banking shorthand, a hawk leans towards tighter policy and higher rates to keep inflation in check, even at some cost to growth – a dove leans the other way, towards lower rates and protecting jobs.
Warsh was unmistakably hawkish, returning repeatedly to the Fed's duty to deliver price stability. And the dots that were submitted carried the point: the median now sees the funds rate ending the year at 3.8%, up from 3.4% back in March, implying at least one rise still to come, with the committee split down the middle.
What saying less means for interest rate guidance
Markets noticed. The two-year Treasury – the maturity most sensitive to near-term rate expectations – jumped by 0.15% to 4.20%, its biggest move on a Fed decision day since 2008. Futures markets are now pricing in an 87% chance of a hike by December, against barely a quarter of that a month ago.
Higher for longer, in other words, and perhaps to President Trump's chagrin, given how loudly he has called for cuts.
Why hold the line under that kind of pressure? Because credibility is the whole game, and Warsh knows it.
The US is borrowing at a scale rarely seen outside wartime, and it does so in the deepest, most important bond market in the world. Keeping faith with that market is not optional – lose it, and everything else gets harder. The recent history of the UK shows this starkly.
Add the scar tissue from the post-pandemic and post-Ukraine inflation surge, when policy stayed loose for too long, and you can see why a new chairman would want to establish his anti-inflation credentials early. And Warsh has had some help from an unlikely quarter.
How falling oil prices could support lower inflation
The tentative US–Iran peace deal, still being untangled but visibly closer, has drained the war premium out of oil.
Brent has fallen from above $110 at the height of the conflict to under $80, as shipping through the Strait of Hormuz starts to normalise.
It is a neat illustration of a point I have made in this column before: high prices cure high prices. A supply shock sends prices up, which destroys some demand and coaxes out new supply – when the original barrels return, the market can find itself better supplied than before.
We began the year expecting an oversupplied oil market, and we may yet get one. The disinflationary effect will take time to feed through, but it is a meaningful tailwind for the fight Warsh has just signalled he intends to wage.
The catch to all this is that reading this Fed will now be harder. With less forward guidance on offer, investors are thrown back on the data, meeting by meeting, which is, of course, exactly the point.
The case for less, in the end, is really the case for credibility. On the evidence of his first meeting, Warsh has chosen his ground.