Fed Keeps Funds Rate Unchanged, Three Voters Dissent

Meeting Highlights

• • The Fed left the funds rate unchanged at its target rate range of 3.50% – 3.75%.  While odds of a rate hike never moved over 50%, there was still some uncertainty given the lack of forward guidance under the Warsh-led Fed. It would have been a big lift to get the necessary votes for a rate hike today and with the cool June numbers, two more months of inflation reports before the September meeting, and a labor market with slightly slowing momentum it was the easier choice for the committee to extend the pause and Warsh concurred. It wasn’t unanimous, however, as Lorie Logan, FRB-Dallas President, Neel Kashkari, FRB-Minneapolis President, and Beth Hammack, FRB-Cleveland President, voted against the pause and instead wanted to hike rates today. That’s the most dissents since the September 2016 meeting. We’re guessing that if Warsh had three more votes to hike today, he would have voted in that direction as well to achieve a majority. In any event, it begins to set the stage for a possible rate hike in September.

   

  • Just as in the June meeting, the statement was much shorter than the Powell-led Fed. There was virtually no notable change from the June statement. Also, same as the June statement, there was no discussion or hint as to the rationale behind the decision, and no clue as to the reaction function that might sway a decision in September. This is in keeping with Warsh’s attempt to limit communication to prevent confirmation bias from infecting the decision process. However, it increases uncertainty and hence potential volatility which by itself could contribute to higher yields as compensation for this heightened uncertainty.

   

  • Fed Funds futures pricing prior to the announcement had 36% odds of a rate hike for today’s meeting and 81% odds of a rate hike in September. After today’s decision and statement, the futures market slightly increased the odds for a rate hike in September (82%), that’s divided between 69% odds for a single 25bp hike and 2.6% odds of a 50bp hike.   Thus, the futures market fully expects the Fed to hike this year, most likely at the September meeting, with a slight chance the hike is for 50bp.

Rate Hiking Odds for September Following July Rate HoldSource: FOMC