Fed Holds Rates Steady, But Surprises Keep Markets Guessing

Eric Lee | Reuters

The Federal Reserve and Chairman Kevin Warsh on Wednesday followed the script on interest rates closely, voting to keep the benchmark level steady, but dropped several surprises that kept markets guessing about where things are heading. Markets didn't like it, with major averages swooning after the meeting and as Warsh spoke in his news conference.

Here are the five biggest takeaways:

No rate changes, but the hawks are circling: There were no apparent dissents to keep the federal funds rate targeted between 3.5%-3.75%. However, the "dot plot" of expectations further out showed an inclination towards a hike later this year. The Federal Open Market Committee split 9-9 between those expecting steady rates or one cut and those seeing at least one hike, with the median "dot" pointing to a quarter percentage point increase.

The dot mystery solved: There was rampant speculation heading into the meeting that Warsh wouldn't be submitting a dot, and he confirmed that he did not. In the past, the chairman has expressed a disdain for all such "forward guidance" as hamstringing future policy. "It's been the practice of this committee for participants to submit these projections, and I have encouraged my colleagues to continue to do so. I, however, have refrained from offering any projections of my own consistent with my long-held views on the SEP, at least as currently structured," he said.

Regime change via task force: Warsh has been promising to shake things up at the Fed, and his first steps in doing so came through the announced formation of five task forces. They are charged with studying communication, the Fed's balance sheet, the data sources on which it relies, productivity and jobs, the impact of artificial intelligence and other transformative technologies, and the central bank's inflation approach.

Tough on inflation: On about a dozen occasions, Warsh used the term "price stability." For a chairman who had opined often about cutting rates, it was surprisingly hawkish talk about his and the committee's "unambiguous and unanimous" resolve to get inflation under control. Markets responded in kind, with the policy-sensitive 2-year Treasury yield soaring by 14.4 basis points.

Brevity is the soul of wit, and monetary policy: Warsh also promised to revamp communications, and the first visible step was a dramatically abridged post-meeting statement. Prior to the new chairman's arrival, the statements generally ran in excess of 300 words, generally consisting of boiler plate language that investors parsed through. This time: The statement ran just 130 words, short and sweet with little ambiguity.

They said it

"Today we believe that the Federal Reserve's FOMC ushered in a new era of monetary policy in the United States." — Rick Rieder, head of fixed income at BlackRock.

"New Fed Chair Warsh sounded a bit like old hawkish Fed governor Warsh at his press conference today repeating multiple times the need for the Fed to deliver on its mandate for price stability," — Krishna Guha, head of central bank strategy and economics at Evercore ISI.

"The [task force] announcements signal an institution in active review rather than steady state, and investors should expect the operating framework of the Fed to look meaningfully different over Warsh's tenure than it did under his predecessor." — Jason Pride, chief of investment strategy at Glenmede.

"Warsh wants his first impression to be as 'the reformer.' We'll see what that means later this year. In terms of the policy outlook, Fed watching just got harder." — Dario Perkins, managing director of global macro at TS Lombard.