Wall Street rises as materials and crypto stocks offset continued bond sell-off
Investing.com -- The Federal Reserve on Wednesday held its key policy rate steady, in a decision that had seen elevated uncertainty coming into it. Fed Chair Kevin Warsh said rising U.S. Treasury yields were proof that markets had reacted to real-time data, adding that the central bank remained "focused like a laser" on delivering price stability.
While the Fed’s action had been mostly expected, the odds of a rate-hike had been higher than recent historical trends due to rapidly shifting inflationary dynamics sparked by volatile oil prices.
The central bank’s Federal Open Market Committee (FOMC) kept the federal funds rate unchanged at 3.50%-3.75% for a fifth straight meeting. However, reflecting the uncertainty over the monetary policy outlook, Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan voted to raise the federal funds rate by 25 basis points.
This is the second Fed decision under the leadership of Warsh. Similar to the statement in June, Wednesday’s announcement was truncated, featuring a single-page with the decision and ending in the brief line: “The Committee will deliver price stability.” Warsh’s public comments since June have been largely hawkish. He has also said the central bank will drop forward guidance, and unveiled a sweeping review of Fed operations by appointing five task forces to tackle items such as communications and inflation frameworks.
At the post-decision press conference on Wednesday, Warsh said the FOMC had a "good family fight" and an "active, robust" discussion centered on four areas: persistent inflation, recent economic shocks, price pressures arising from those shocks, and monetary policy tools. He also said the dissents by the three regional Fed presidents did not "capture the full essence of the discussion." Warsh noted that the effect of soft June inflation data on the rate decision was "not much."
The Fed’s job has been complicated by a dynamic situation in the Middle East and the resulting volatility in oil prices since the last rate decision in June. At that time, crude benchmarks were elevated, prompting nearly half of the FOMC’s members to pencil in anticipated rate hikes this year. Oil slid soon after that following the inking of an interim peace deal between the U.S. and Iran, only for that agreement to fall apart this month and lead to a resurgence in crude prices.
Notably, rising U.S. Treasury yields have effectively played the role of a rate hike, as an increase in yields usually makes borrowing more expensive for consumers and businesses. The benchmark U.S. 10-year yield has jumped more than 14 basis points since the Fed’s June meeting.
Warsh on Wednesday noted that increases in nominal and real yields across the Treasury curve since the last meeting had been "among the most significant in the last two decades, ranking around the top decile or so."
"But if the Committee didn’t change its policy rate, what happened? In the inter-meeting period, market attention centered on real data and real economic developments. Prices reacted in real time to incoming information, and the reduction in forward guidance may have been a factor. Market participants are learning to play the ball, not the referee—and market prices will continue to respond in the direction and magnitude they see fit. This is, in my view, a change for the better—and we are just getting started," the Fed chair said in his prepared remarks.
Later, when responding to a reporter’s question, Warsh said the Treasury market seemed to be reflecting factors such as solid U.S. economic output, strong capital expenditures and productivity, and "solid" and "steady" labor markets.
"The Fed’s decision to leave rates unchanged is consistent with expectations and reflects a patient, data-dependent approach to monetary policy," Kim Escue, portfolio manager at Shelton Capital Management, told Investing.com.
"While inflation remains above the Fed’s target, recent moderation in CPI, expectations for a lower PCE reading, and tighter financial conditions resulting from higher real yields all supported the case for remaining on hold. Broader macroeconomic trends also reinforce this view. GDP growth has slowed from its above-trend pace toward a rate more consistent with the economy’s long-run potential, while labor market conditions have continued to normalize," she said.
"Additionally, money supply growth has remained subdued. Overall, the signs of the economy overheating have diminished. While oil prices have risen in recent months, they remain well below the levels that contributed to the inflation surge several years ago, limiting the risk of a sustained acceleration in inflation. Combined with already restrictive real interest rates, these factors suggest that the current Fed target rate continues to restrain demand without unnecessarily increasing the risk of a sharper economic slowdown," Escue added.
