The Fed held rates steady (as expected) at this week's meeting. With Kevin Warsh on his way to Senate approval, this was Powell's goodbye as Fed Chair. He announced he will make the highly unusual move of remaining on the Board and voting on interest rates (1948: Marriner Eccles stepped down as Fed Chair but continued on Board until 1951). His reason: he feels the Fed's independence is at risk and "…I will not leave the Board until this investigation is well and truly over with transparency and finality." He added that "I'm encouraged by recent developments." He also pledged not to usurp incoming Chair Warsh.
The Fed board also engaged in a rare level of dissent, as three members indicated they agreed with the "pause" decision but "did not support the inclusion of an easing bias in the statement." The statement reads: "In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks." (emphasis added) The word "additional" implies that the next rate move would be a cut, since the last moves have been cuts. This may have been a signal to Warsh that the Fed is not on a pre-set path. Fed President (and dissenter) Kashkari explained their thinking in remarks today: "The FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves." If Powell stays on, Warsh will take Steven Miran's seat (he dissented in favor of a rate cut this week). Warsh will have to create consensus amongst the inflation hawks and rate doves.
Changes in Balance Sheet? Powell presided over massive quantitative easing in March–May 2020, as the Fed bought over $3 trillion in Treasuries and mortgage-backed securities in 100 days (and continued after that). The 10-year Treasury dropped to below 1% while home mortgages were about 2.75%. Warsh feels that the Fed's balance sheet is too high at $7 trillion. Warsh: "it's a bloated tool that blurs the line between monetary and fiscal policy" (thereby intruding on the Treasury Department's domain and distorting capital markets). He advocates for a "slowly and deliberately" reduced balance sheet to restore Fed independence. He also feels the portfolio should not include any MBS and concentrate solely on Treasuries. Stay tuned…
