Scenario | Probability | Assessment | |
Hawkish Hold Base Case | 55% | Statement: Given the restructuring of the FOMC statement (Fed decision and vote count are now at the top with voter names omitted, at least for now) as part of the effort to reduce “forward guidance,” there isn’t much to work with when trying to read between the lines. That said, if a few FOMC members want to refresh the macro paragraph and stress that “persistent” shocks from the on-again/off-again war and supply-chain disruptions can eventually lead to higher inflation being embedded into consumer prices, along with some or several (2-3) dissenting votes in favor of a hike, that would constitute as hawkish hold outcome in our book. Presser: We have heard from Chairman Warsh twice since his hawkish opener at the June FOMC (ECB’s Sintra event and at the Semi-Annual Testimony). He kept avoiding forward guidance by keeping his answers short & sweet. However, if there was dissents, he’ll need to explain why as he is the only member that can speak on behalf of the FOMC. Given his hawkish demeanor as of late, clarifying the message could maybe amplify it. Although Chairman Warsh does not want to provide forward guidance, if the FOMC wants to flag that the next couple month’s data releases (July/August) are critical for the policy path, he may say something like “if labor data remains solid, but inflation is elevated, the FOMC is prepared to tighten in the upcoming meetings.”
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Neutral Hold | 40% | After years of forward guidance, we are still trying to calibrate what it means to be hawkish/neutral/dovish in a Warsh led Fed. But for a neutral spin, the statement will stay relatively the same and there are no dissents. In the press conference, Warsh won’t go dovish but may dial back hawkishness by stating that they are data dependent and that financial conditions, on the margin, are tightening for the Fed, as we all wait for more information. He will likely field questions on the taskforces and will likely pivot back to those during the Q&A.
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Hawkish Hike (25 bps) | 4% | To answer our own question, we do not see the urgency to hike rates, now. Yes, crude oil prices, and more importantly distillates (like diesel and jet fuel), have risen and inflation fears returned, but on average, crude oil isn’t that much higher in July versus June. Overall, we don’t see why there is suddenly an urgency to act, especially for a so-called data dependent Fed that just saw softer inflation data in June and a weaker NFP.
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Uber-Hawkish Hike (50bps) | <1% | If everyone’s wrong, the real worst-case scenario is that Warsh is not only talking tough, but he also wants to hammer down inflation. That would require him to lead the charge to level set rates by surprising with a 50bp hike (ala the midcycle adjustment of 1997). Fearing backlash, he would need to say this is a “tactical” move to help put inflation on track to 2%. To avoid the risk of further hikes being priced-in, he could state this action buys FOMC time to see what to do from a strategic perspective vis-a-vie taskforces future recommendations.
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