Latest / The Issue at Hand by Madison Investments / The Warsh Fed: A New Playbook for Bond Investors?
Transcript
- speaker-0: Welcome back to the issue at hand market brief. I'm Chris Alamon and I'm joined by Mike Sanders. How you doing, Mike? So before we dig into exactly what came out of the meeting, I wanted to recap a couple of things that we kind of expected going into this meeting. One of the questions that we had was, is the Fed going to stick to its mandate, its dual mandate of stable prices, maximum employment? Two, what was the Fed's outlook gonna look like under the new Fed chair? speaker-1: Good, doing good. speaker-0: Was it gonna be more dovish? Was it gonna 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? speaker-1: Yeah, so we we heard a lot. you know, from a dual mandate perspective, ⁓ you know, not a lot discussed in terms of the labor side. It was much, much more about ⁓ the price stability side getting inflation back down to two percent, explicitly in the statement. And so that definitely kind of led to a more hawkish overall tone. I think when we chatted prior to the meeting, it was well, they can't be dovish. Credibility issue. Maybe neutral to hawkish is where they'll go. And the he and you know the statement and how he discussed their discussion behind closed doors was definitely in the hawkish end of ⁓ the expectations. And you know, you you saw that kind of in market reaction with you know front-end interest rates increasing quite significantly, two-year moving higher, and then the back end, you know, tens and thirties. Tens moved a little bit higher, but thirties. speaker-0: How much, yeah. speaker-1: Slightly down. So you know, for long term bond investors, you want a a Fed that wants inflation lower. speaker-0: Yep. Well I think one of the things that, you know, ⁓ we went into going this too was was there anything that sounded materially different from the last era, I guess, with Powell? Like was there anything that you got out of this that you see like, hey, this is going to be different? speaker-1: Well, I think the the one thing that's different is Walsh didn't provide a any dots. He didn't provide any guidance of what his thinking was. His own dots, yeah. And so there are dots by the other members and pricing from a dots perspective in terms of you know, Fed funds rate, half of them, you know, indicated a a hike by the end of the year. Warsh definitely wants to provide less guidance. speaker-0: He didn't provide his own dots. speaker-1: and wants the market to react to incoming data and then the Fed can react how they want to react. But it's you know, it's definitely a different ⁓ perspective than what prior the the the ri recent few Fed ⁓ people wanted and so it's probably closer to what Greenspan had what speaker-0: Can we can we come back to that? One of the advisors asked me a question is why is that important? Why wouldn't we want to hear the Fed basically laying out everything as often as possible? speaker-1: I mean, Warsh was asked that specific question and you know his response, at least my interpretation of it, was that he would much rather have market markets kind of provide the the it the data, understand the data and react to it than the Fed because forecasts change, right? You have I mean, if you think about right, oil prices are falling, you have the the deal signed or will be signed with speaker-0: Yeah. speaker-1: Yeah, so it's it's information changes very quickly. I think he just would much rather have the market react to it and then the Fed can decide what they want to do. But he he's he's a big believer in market pricing and market, you know, changing and then incorporating information into what speaker-0: Priced him. 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 was basically like, I don't want any of the governors to be hemmed in based on some of their 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 you mentioned it earlier was 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 heights or even for pricing perspective. We you touched on it a little bit, but can we get a little bit more in the details? speaker-1: Yeah, you know, nine of the eighteen dots were for ⁓ a hike, one or more hikes. Some of ⁓ had three hikes. There was one that wanted a cut and then another but their balance wanted no change through the end of the year. Yeah. ⁓ you know. Again, that could be old information based upon what we see in the energy markets ⁓ going forward. But, you know, the market had priced in a possibility of a hike in twenty seven. That's been kind of pitchward given the dots for whatever they're worth. And the dots are one thing, but even the tone and the hawkish commentary from Walsh kind of pulled forward the possibility of a hike through the end of the year, third quarter, you know, fourth quarter type ⁓ type possible end of the third quarter into the fourth quarter type possibility. So the dots and the hawkish tone definitely hurt ⁓ the short end of the curve. Yeah. was really scrolling pretty high, yeah, I guess moving higher given given expectations prior. speaker-0: think it sounds like your biggest takeaway was kind of from an expectations perspective, like short term, we're still we're ready to stay neutral. But I think longer term, maybe not even longer term, maybe two, three, two, four as just indicated, it'll have an impact on bond prices. So as a bond investor, how should we look about being positioned given the expectations for where we think rates are gonna go? speaker-1: You know, I I think a Fed that is very, very aware of the and and wants to ⁓ get back to the two percent price level is gonna keep longer term bond yields at levels today or possibly lower. I think that's the biggest takeaway. Yeah. Our feeling before was, you know, the Fed would cut rates to help the labor market if the labor market will falter. The fact that the Fed didn't really even mention the labor market. No, because the market's doing fine, right? speaker-0: But I sounded it was pretty telling. Yeah. speaker-1: Yeah, but it definitely seems that you know still obviously the dual mandate. There was no sunlight in there, if you will. There is a a very, very strong focus on the inflation side. And I you know, that's gonna be good for long term investors. ⁓ might be some pain on the front end at points in time, depending how the data evolves. But from a bond investor perspective, ⁓ you know, it's a good thing. You wanna keep inflation so your real returns you are gonna do better. speaker-0: Yeah. Well, I think I wanna I just to recap what we've been talking about is 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 think it was I guess if I can sum up what you said, it was a little bit more hawkish than we kind of went in thinking. As you said, everything's kind of being pulled forward, but for right now, again in the short term, nothing's changing. And then I think from lastly, I think 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? speaker-1: Yeah, I d just me two two things I would add would be one, you know, that any thought that there'd be some political bias to ⁓ war she's gone. He was unbelievably independent, I guess, given you know prior statements. speaker-0: I feel like I don't want to say unbelievable but I think he was just he did what he was supposed to do. speaker-1: Yeah, exactly. He was he was hawkish. The the data says he should be hawkish and he was hawkish and he wasn't apologetic to being hawk. I think the other, you know, interesting thing that we'll see how this evolved. I don't think it's an immediate ⁓ movement in rates, but you know, down the road, you know, there was these task forces that were our that were brought up. Five five different task forces and obviously different parts of the economy, how the Fed looks at productivity and jobs and how they communicate and you know lots of different speaker-0: Exactly. Five of ⁓ in fact. Yeah. speaker-1: ⁓ items to to view and and again nothing immediate but you know i that's gonna you know change how the Fed looks at data, how the Fed communicates with the markets and you know it'll be something that we'll be watching for down the road. Again, I don't think it's gonna be the next Fed meeting we're gonna start getting impacts from these committees, yeah. These task forces, but I do think that, you know, down the road it's definitely going to change how the Fed's going to interact with with the market participants. speaker-0: No, that's a great point. I think when I heard the just the sheer number of task force, I thought it was interesting. But I think it's a that's a good place to stop there. So what do you think? All right. 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. speaker-1: Yeah, I think so.