The Issue at Hand by Madison Investments
The Federal Open Market Committee (FOMC) held interest rates steady at their June meeting as inflation remains above the Fed’s target and the labor market continues to show resilience. While the policy decision itself was widely expected, investors were more focused on the outlook and messaging from the first policy meeting of new Chair Kevin Warsh.
In this Market Brief, Chris Aleman and Mike Sanders discuss the key takeaways from the meeting, what advisors should pay closest attention to in the Fed’s updated dot plot, and how to interpret the policy decision and outlook for client portfolios.
Key Takeaways
- Inflation, rather than employment, was the dominant focus of the June FOMC meeting, contributing to a more hawkish tone than many expected.
- Chair Warsh emphasized a more data-dependent approach, offering less forward guidance than recent Fed leaders.
- A continued focus on price stability may support long-term bond investors, despite potential volatility at the front end of the yield curve.
The Discussion
Chris Aleman: Hello, and welcome back to The Issue at Hand – Market Brief. I’m Chris Aleman, and I’m joined by Mike Sanders. How are you doing, Mike?
Mike Sanders: Doing good, doing good.
Chris Aleman: So, before we dig into exactly what came out of the meeting, I wanted to recap a couple of things that we expected going into this meeting. One of the questions that we had was: is the Fed going to stick to its dual mandate of stable prices and maximum employment? Two, what was the Fed’s outlook going to look like under the new Fed chair? Was it going to be more dovish? Was it going to be more hawkish? And then I think lastly, we just wanted to make sure that the Fed’s credibility kind of stayed intact with this. So, I guess with all that as the backdrop, Mike, what did we hear yesterday?
Mike Sanders: Yeah, so we heard a lot. You know, from a dual mandate perspective, not a lot was discussed in terms of the labor side. It was much more about the price stability side, getting inflation back down to two percent – explicitly in the statement.
And so that definitely led to a more hawkish overall tone. I think when we chatted prior to the meeting, it was, well, they can’t be dovish – it’s a credibility issue. Maybe neutral to hawkish is where they’ll go – and the statement and how he discussed their discussion behind closed doors was definitely on the hawkish end of the expectations. And you saw that in market reaction with you know front-end interest rates increasing quite significantly, two-year moving higher, and then the back-end, tens and thirties – tens moved a little bit higher, but thirties, slightly down. So, for long-term bond investors, you want a Fed that wants inflation lower.
Chris Aleman: Well, I think one of the things that we went into going into this, too, was – was there anything that sounded materially different from the last era with Powell? Was there anything that you got out of this that you see like, “hey, this is going to be different”?
Mike Sanders: Well, I think the one thing that’s different is that Warsh didn’t provide any dots. He didn’t provide any guidance on what his thinking was.
Chris Aleman: He didn’t provide his own dots.
Mike Sanders: His own dots, yeah. And so there are dots by the other members, and pricing from a dots perspective in terms of Fed funds rate, half of them indicated a hike by the end of the year. Warsh definitely wants to provide less guidance and wants the market to react to incoming data, and then the Fed can react how they want to react. But it’s definitely a different perspective than what the recent few Fed people wanted. And so, it’s probably closer to what Greenspan had way back when –
Chris Aleman: Can we come back to that? One of the advisors asked me a question: Why is that important? Why wouldn’t we want to hear the Fed basically laying out everything as often as possible?
Mike Sanders: I mean, Warsh was asked that specific question and his response, at least my interpretation of it, was that he would much rather have markets understand the data and react to it, then the Fed – because forecasts change, right? If you think about, oil prices are falling, you have the deal signed – or will be signed – with Iran and the Middle East. So information changes very quickly. I think he would much rather have the market react to it, and then the Fed can decide what they want to do. But he’s a big believer in market pricing and market changing and incorporating information into what it’s priced in.
Chris Aleman: Yeah, I think that was important. I got that question. And one of the things I also liked was Warsh’s comments before the meeting. It was basically like, “I don’t want any of the governors to be hemmed in based on some of the earlier comments. I want them to have that flexibility.” So, I thought that was important. I think the other thing that I wanted to bring up was, as you mentioned earlier, the dot plot. We didn’t get it from the Fed chair, but we did get it from everybody else. So, what did that tell you about the potential for hikes or even for pricing perspective? You touched on it a little bit, but can we get a little more in the details?
Mike Sanders: Nine of the eighteen dots were for a hike – one or more hikes. Some of them had three hikes. There was one that wanted a cut, and then another balance wanted no change through the end of the year. Again, that could be old information based upon what we see in the energy markets going forward. But the market had priced in a possibility of a hike in ‘27. That’s been kind of pulled forward given the dots, for whatever they’re worth. And the dots are one thing, but even the tone and the hawkish commentary from Warsh pulled forward the possibility of a hike through the end of the year, third quarter into the fourth quarter type possibility. So the dots and the hawkish tone definitely hurt the short end of the curve with rates going pretty high – I guess moving higher – given expectations prior.
Chris Aleman: I think it sounds like your biggest takeaway was, from an expectations perspective, short-term, we’re still ready to stay neutral. But I think longer term, maybe not even longer term, maybe Q3, Q4, as you just indicated, it’ll have an impact on bond prices. So, as a bond investor, how should we think about being positioned given the expectations for where we think rates are going to go?
Mike Sanders: I think a Fed that is very, very aware and wants to get back to the two percent price level is going to keep longer-term bond yields at levels today or possibly lower. I think that’s the biggest takeaway.
Our feeling before was that the Fed would cut rates to help the labor market if the labor market were to falter. The fact that the Fed didn’t really even mention the labor market – not because the market’s doing fine, right? The unemployment rate.
Chris Aleman: But I still think it was pretty telling.
Mike Sanders: But it definitely seems that it’s still obviously the dual mandate. There was no sunlight in there, if you will. There is a very strong focus on the inflation side. And that’s going to be good for long-term investors. Might be some pain on the front-end, at points in time, depending on how the data evolves. But from a bond investor perspective, it’s a good thing. You want to keep inflation so your real returns are going to do better.
Chris Aleman: Well, I guess to recap what we’ve been talking about – did the Fed stick to its mandate? Yes, I think they are still focused on employment and inflation, as you mentioned. Did the Fed’s comments for future expectations – what did we see from that? I guess if I can sum up what you said, it was a little bit more hawkish than we went in thinking. As you said, everything’s being pulled forward, but for right now, again in the short term, nothing’s changing. And I think lastly, the credibility, I think to your point, when you’re focused on the data and having the data dictate where you’re going to go, I think it was good to hear the Fed again reinforce that and stick to it. So, I guess that’s my recap. Is there anything else that you heard that hasn’t been mentioned that you think everybody wants to hear about?
Mike Sanders: Just me two things I would add would be, one, you know, that any thought that there’d be some political bias to Warsh. He was unbelievably independent, I guess, given you know prior statements.
Chris Aleman: Well, I don’t want to say unbelievable, but I think he did what he was supposed to do.
Mike Sanders: Yeah, exactly. He was hawkish – the data says he should be hawkish, and he was hawkish, and he wasn’t apologetic being hawkish. I think the other interesting thing that we’ll see how this evolves – I don’t think it’s an immediate movement in rates, but down the road there were these task forces that were brought up.
Chris Aleman: Five of them, in fact.
Mike Sanders: Yeah, five different task forces. Obviously, different parts of the economy, how the Fed looks at productivity and jobs, and how they communicate, and lots of different items to view. And again, nothing immediate, but that’s going to change how the Fed looks at data, how the Fed communicates with the markets, and it’ll be something that we’ll be watching for down the road. Again, I don’t think it’s going to be the next Fed meeting we’re going to start getting impacts from these committees, these task forces. But I do think that down the road, it’s definitely going to change how the Fed’s going to interact with the market participants.
Chris Aleman: No, that’s a great point. I think when I heard just the sheer number of task forces, I thought it was interesting. But I think that’s a good place to stop there. Well, thanks, Mike, again, for sharing a lot of your insight on this. And thank you, everyone, for joining the Issue at Hand – Market Brief.