Warsh Faces Uphill Battle As FOMC Minutes Show Deeply-Divided Fed Against Easing Bias

Tl;dr: FOMC Minutes confirm a deeply-divided Fed with a hawkish bias as “majority” saw hike likely warranted, “many” preferred removing easing bias.

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Since the last FOMC meeting (Powell’s last), on April 29th, stocks and the dollar are up, bonds and gold are down and oil has swung violently in between…

Source: Bloomberg

Expectations for Fed action this year has surged hawkishly from a 20% chance of a single rate-cut to an almost 100% chance of a single rate-hike this week (before today’s decline)…

Source: Bloomberg

And that hawkish shift has occurred as US macro data has dramatically surprised to the upside (with both growth and inflation data higher than expected)…

Source: Bloomberg

Today’s FOMC minutes will be closely watched for further details surrounding the increasingly hawkish split within the Committee following the April meeting.

With three voters dissenting against retaining the easing bias – and Fedʼs Collins later suggesting she would have supported removing it too – markets will look to see how broad support was for removing the easing bias, particularly after Powell said more officials now view a hike just as likely as a cut.

So what did the Minutes show…?

Main headlines from the Minutes:

• *FED: VAST MAJORITY SAID INFLATION COULD STAY ELEVATED LONGER

• *FED: OFFICIALS SAID INFLATION, WAR COULD MEAN LONGER RATE HOLD

• *FED: OFFICIALS EXPECTED JOB MARKET TO STAY STABLE IN NEAR TERM

• *FED: MANY PREFERRED REMOVING EASING BIAS FROM STATEMENT

• *FED: MAJORITY SAW HIKE LIKELY WARRANTED IF INFLATION PERSISTS

• *FED: SEVERAL SAW RATE CUTS THIS YEAR IF INFLATION DISSIPATES

Inflation fears…

With regard to the outlook for monetary policy, participants generally judged that the continued elevated inflation readings together with uncertainty related to the duration and economic implications of the Middle East conflict could necessitate maintaining the current policy stance for longer than previously anticipated.

Several participants highlighted that it would likely be appropriate to lower the target range for the federal funds rate once there are clear indications that disinflation is firmly back on track or if solid signs emerge of greater weakness in the labor market.

A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent.

To address this possibility, many participants indicated that they would have preferred removing the language from the postmeeting statement that suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions.

Labor optimism…

Another factor supporting a more hawkish Fed outlook: improving signals from the labor market.

At the Fed’s March meeting, officials’ most recent data in hand was the ugly February jobs report.

At the time, many officials were worried that “labor market conditions appeared vulnerable to adverse shocks,” per the March minutes.

But by their April meeting, Fed officials had their hands on the more upbeat March report, and most took the numbers as evidence of stabilization, according to the newly released April minutes.

After the April Fed meeting, the strong April jobs report released earlier this month added further evidence that the labor market may be finding its footing.

More hawkish-er…

The minutes from the Fed’s April meeting show that a growing group of officials raised hawkish concerns as the Iran conflict lifted inflation.

At the central bank’s previous meeting in March, a group of “some” participants had said there was a strong case for the Fed to give balanced guidance that its next move could be either a hike or cut, leaning against the status quo that an eventual cut was in the cards.

In April, this group grew to include “many” officials who would have preferred more neutral language in the policy statement.

Staff Economic Outlook

The staffs outlook for economic activity was slightly stronger than the one prepared for the March meeting.

Not too much new that we didn’t get from the presser (or post-presser comments) but now it’s confirmed that The Fed is deeply divided with the bottom line being that the dynamic disclosed from these Minutes may create challenges for incoming Chair Warsh, whose first meeting will be in June.

While Warsh has advocated lower rates, he may find limited support for a more dovish stance within the current Committee.

Additionally, Warsh has advocated for a tighter balance sheet policy. Last week, Fed Governor Barr argued that easing bank liquidity requirements to shrink the Fedʼs balance sheet would undermine financial stability and increase the Fedʼs market footprint. Barr said the 2023 banking stresses suggest liquidity requirements should rise, not fall. As such, traders will also watch the minutes for any discussion surrounding future balance sheet strategy alongside the debate over the easing bias.

On a side-note, when President Trump was asked today about the fact that the markets are now pricing in rate-hikes (and whether he thinks Warsh will deliver the lower rates that Trump has long demanded), his remarks were surprisingly placid.

“I’m going to let him do what he wants to do,” Trump said.

“He’s a very talented guy, he’s going to be fine, he’s going to do a good job.”

Trump is seemingly giving Warsh some room to maneuver, implying that he may not immediately get the Powell treatment even if Warsh delivers a hawkish monetary policy message in his early months in office.

Read the full Minutes below