Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / Why the Fed Is Suddenly Talking About International Spillovers
Transcript
- Lucas: So the FOMC held rates steady this month at three point six three percent, which was widely expected. The real surprise was in Kevin Warsh's press conference — he spent a good chunk of the opening statement talking about international spillovers. Luna: That's not something we hear a lot from Fed chairs. Usually it's all domestic data dependency. Lucas: Exactly. But Warsh specifically mentioned that 'geopolitical developments abroad have introduced new uncertainties into the outlook.' He didn't name names, but the context is pretty clear. We had those devastating earthquakes in Venezuela last week, and then Iran calling the new Hormuz shipping route 'unacceptable and dangerous.' Luna: And the US just issued those sweeping Iran oil sanctions waivers, which unlocked billions for Tehran. That's a weird dynamic — we're sanctioning Iran but also waiving sanctions, and meanwhile the Strait of Hormuz is back in the headlines. Lucas: Right. So Warsh is essentially saying: the Fed can't ignore this. If oil supply gets disrupted, that's a direct inflation shock. And we're already dealing with sticky services inflation — core CPI came in at three three six point one in May, up from three three five point four. That's not falling fast. Luna: But here's what I find interesting. The ten-year breakeven inflation rate actually dropped to two point one eight percent this week. That suggests bond traders are less worried about long-run inflation, not more. Lucas: Yeah, that's a genuine tension. Breakevens falling while the Fed flags upside risks. One interpretation is that markets think the Fed will actually be able to contain any oil spike — that higher short-term inflation won't feed through to expectations. But Warsh seems less confident. Luna: He also mentioned the factory job cuts report from S&P, which showed layoffs in June near financial crisis and COVID levels. That's a direct domestic concern. Lucas: And he tied it back to the global picture. The logic is: if foreign demand weakens because of geopolitical turmoil, that could hit US manufacturing exports. And if factory job cuts accelerate, that could soften the labor market more than the overall payroll numbers suggest. Luna: So is Warsh essentially preparing the ground for a rate cut later this year, but using international risks as cover? Lucas: I think it's the opposite, actually. He's saying the risks are two-sided. On one hand, an oil shock could push inflation up. On the other, a global slowdown could pull growth down. That's a classic stagflationary scenario, and the Fed doesn't want to get locked into one path. Luna: So they're staying flexible. But the market still sees a high probability of a cut by September, based on fed funds futures. Lucas: Right, and Warsh didn't push back on that directly. He said 'we will be data dependent' — the usual line. But the emphasis on spillovers tells me they're watching a broader set of indicators than usual. It's not just CPI and payrolls anymore. It's oil transit routes, earthquake recovery, sanctions policy. Luna: That's a lot for a central bank that used to pride itself on only caring about domestic core inflation and maximum employment. Lucas: Well, and that's the shift worth focusing on. The Fed's reaction function has expanded. If you're trying to guess the next move, you now have to factor in events that are totally outside the US economy. That makes forecasting harder, but it also makes the Fed more responsive to real-world shocks. Luna: You know, one thing that strikes me about this episode — if walking through the economy with us has made something click, we should mention that we deliberately keep these conversations free of ads. No sponsors, no interruptive messages. Lucas: Yeah, that's really important to us. If you want to support that approach, there's a simple way to do it. It's buy me a coffee dot com slash fexingo. All lowercase, and it genuinely helps. Luna: Just a small way to keep the show independent. Okay, back to the Fed. So Warsh also mentioned the interest on reserve balances rate staying at three point six five percent. That's a technical detail, but it signals they're not tightening liquidity further. Lucas: Good catch. The IORB rate is the top of the Fed's policy band, and leaving it unchanged reinforces that the fed funds rate is where they want it. No hidden tightening via reserve remuneration. Luna: So net-net: rates on hold, but the range of inputs the Fed is weighing has expanded. Oil geopolitics, factory layoffs, international demand. Lucas: Exactly. And I think the key takeaway for listeners is this: if you see headlines about Venezuela or Iran or the Strait of Hormuz, don't assume those are just foreign policy stories. The Fed is watching them too. And that could affect the timing of the next rate move. Luna: It's a good reminder that the global economy is more connected than it sometimes feels. Even for a central bank that focuses on the US. Lucas: Right. And we'll keep tracking how Warsh and the FOMC navigate this. Next meeting is in July, and we'll have the new dot plot then too.