Hawks Take Flight | Joseph Wang on Fed’s Hawkish Hike and Warsh’s Gameplan

Jack Farley (0:00)

We are live right now. I am joined by Joseph Wang, former Senior Trader for the Fed, a commentator on the Federal Reserve. Joseph, what did you make of the Fed meeting that just concluded Kevin Warsh's third meeting, the first hike? What are your thoughts?

Joseph Wang (0:18)

Well, first off, thanks so much for inviting me. It's great to be back here. Great to see you again, Jack. Now, I am actually pretty happy about this outcome because this is one of the, not always, doesn't always happen, but I did call this perfectly well. After I heard the Jackson Hole speech, I was pretty sure that we were going to hike in September, like 90 percent sure. Because when you read carefully his speech, it was super clear. He added two new things into his speech that he hadn't added before. Add Jackson Hole, which of course is when a Fed chair gives his big speech. He knows he's changing policy. He said two things. One, of course, is that he didn't feel financial conditions were restrictive. So Jack, come on, we've been talking about the Fed long enough to know. That's like a huge, huge billboard saying that I'm going to hike.

Now, he said that before though, but what was also new that I'm surprised did not get as much air was that he introduced a new variable, speed.

Add Jackson Hole, he talked about the speed of getting back to target. So that tells me there was urgency. He put the two together. Obviously, hike was a done deal, and it was really surprising to me to see that in the community, there were so many people who had trouble believing this. But he was a man of his word. That means he's still worth listening to. Otherwise, it would be quite disappointing. So he did hike. This is what I would expect. I also thought that today we would get actually somewhat of a hiking cycle. It would not be one and done. There are two things we heard today that confirms that. Well, first off, there's a doubt plot, of course, suggesting there were.

The doubt plot is penciling median, one more hike this year. Next year, the median is not a hike, but then also keep in mind that the median is of December next year. So it's still possible that you could hike maybe March or some next year and then go back down to unchange over the year. But in any case, the two things he said today that I thought were the highlights of the conference, other than the doubt plot were that he looked around the table, he and everyone was, he's hard pressed to find anyone finding financial conditions to be restrictive, right? That's telling you that everyone is on board. What we're doing right now, the current sense of policy is not enough to get back the 2 percent. And to support that, you have the unanimous Fed decision today, everyone voted for the hike.

The second thing that I thought was very important, and he repeated this, is how he phrased today's hike. He's rephrasing it as removing a dosage of accommodation. So he still thinks that financial conditions are restrictive, sorry, are accommodative, pardon. And so that tells me that he has to do at least another hike, probably two more to get it into restrictive zone. So again, this is pretty much read between the lines. Kevin is Chair Warsh now, I think he's earned that, he's doing a good job now, is someone who doesn't give forward guidance, doesn't really even talk about his reaction function, and those two are different things. But he is someone who is a lawyer by background, so he knows how to wordsmith. And so I took that to mean that we're going to have maybe, I think, two more hikes after today. And so right now, as we're recording, it looks like the market is digesting that. You can see risk assets selling off.

I think there was tremendous amounts of copium coming into this.

Gold, of course, selling off. What is a little bit more curious, though, it doesn't seem to have brought down the long end much. I would have assumed that with a Fed that is showing a bit more confidence, oh, sorry, a bit more determination in bringing inflation down would have given the long end more confidence. And maybe you would have a bigger reaction, that is to say lower long end yields. I don't see that yet. So overall, this was a pretty hawkish conference. And I think it's actually an exciting time. We could have a repeat to a much smaller extent of the last rate hiking cycle, which was not good for risk assets. And I believe, Jack, back then, you and I were talking about that. And that is exactly what happened.