Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How Kevin Warsh's Phrases Reveal the Fed's Next Move
Transcript
- Lucas: If you've been watching the ten-year breakeven rate drop to 2.21 percent while core PCE ticks up to 130.1, you are probably wondering which signal the Fed actually trusts. Kevin Warsh gave a speech this week that pretty much answers that question. Luna: Warsh isn't on the FOMC anymore, but he's still one of the most closely watched former governors. What did he say that's got people talking? Lucas: He homed in on three specific phrases: 'data dependence', 'patient but prepared', and 'the neutral rate is uncertain'. Fed watchers are parsing them like tea leaves — and they're pointing toward a cautious hold in July. Luna: Speaking of parsing signals — this is exactly the kind of analysis we can do because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. It keeps the show ad-free and lets us dig into the details. Lucas: Yeah, it's a small group, but it genuinely makes a difference. And it means we don't have to cut to a commercial break right when things get interesting. Luna: Exactly. So back to Warsh — what's the first phrase and why does it matter now? Lucas: 'Data dependence' sounds obvious, but Warsh used it to emphasize that the Fed is not on a preset course. With the breakeven falling and import prices from China hitting their highest since 2008, the data is genuinely two-sided. Luna: Right, the breakeven drop suggests inflation expectations are cooling, but import prices from China are up — that's a supply-side shock that could feed into consumer prices. Lucas: Exactly. So 'data dependent' means the Fed is willing to wait for more clarity. That's what markets took from it — the S&P 500 and NASDAQ sold off a bit after the speech, but not in a panic. Luna: What about 'patient but prepared' — that sounds like they're ready to act if needed. Lucas: That's the second phrase. Warsh used it to signal that the Fed is comfortable holding at 3.63 percent, but if core PCE continues to rise or the Singapore tightening spills over, they can hike quickly. The two-year yield has already moved up 1.8 percent in the last five days. Luna: So 'patient but prepared' is basically their hawkish lean — they're not in a hurry, but they're keeping the door open. Lucas: Right. And the third phrase — 'the neutral rate is uncertain' — is the most telling. Warsh basically argues that R-star may have risen, which means the current policy rate isn't as restrictive as it looks. That gives the Fed cover to hold or even hike. Luna: So if the neutral rate is higher, then 3.63 percent isn't actually tight. That's a big shift from the narrative earlier this year. Lucas: Huge. And it aligns with what we've seen in the yield curve — the ten-year at 4.64 percent, the two-year at 4.40. The curve is steepening, which typically happens when the market expects either growth or inflation to pick up. Luna: Given the tariff news and the surprise Singapore tightening, it makes sense that the Fed wants to keep options open. Lucas: Absolutely. Warsh's three phrases are essentially a roadmap: wait, watch, and don't rule out a hike if the data forces it. For listeners trying to read the tea leaves, that's about as clear as it gets. Luna: And the breakeven falling? That seems to contradict the hawkish tone. Lucas: It does on the surface, but Warsh would say the breakeven is being pulled down by global disinflationary forces — China's slowdown, falling energy prices — while domestic inflation remains sticky. The Fed focuses on the core PCE, which is up. Luna: So they're essentially looking past the headline breakeven and honing in on the underlying services inflation. Lucas: Exactly. The core PCE excluding shelter is still running above 3 percent. That's the kind of number that keeps the 'prepared' part of 'patient but prepared' very real. Luna: This is why I love these deep dives into Fed speak. It's not just jargon — it's strategy. Lucas: And it's why we do this show. Kevin Warsh gave the market a framework this week: data dependent, patient but prepared, neutral rate uncertain. If you're an investor or just someone trying to understand where rates are going, those three phrases are your compass. Luna: Right. And just to wrap — does this mean the July FOMC meeting is a lock for a hold? Lucas: Almost certainly. But the statement language will be key. If they adopt any of Warsh's phrasing, expect the market to recalibrate expectations for September. Luna: Good point. We'll be watching. Lucas: That's all for today. Thanks for being here — and to those who support us on buy me a coffee, we couldn't do it without you. Luna: Absolutely. See you next time.