Is the Fed the referee or the best player?

Rob Armstrong (0:00)

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Katie Martin (0:58)

This week was billed as the Super Bowl for Financial Markets with a high stakes, high drama meeting for the US Central Bank, the second under its new leadership of Kevin Warsh. His first post-rate decision press conference went pretty well, all things considered. But how did he fare with that difficult second album? Well, not great. It's not so much what he did, but what he said, and the market is testing him pretty hard. Today on the show, does the Federal Reserve need to steady the ship here? And if it does, how?

This is Unhedged, the Markets and Finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a Markets columnist at the FT in London, back from some very lazy days on a beach in Greece.

Joining me down the line from New York City is the big man, Rob Armstrong, off of the Unhedged newsletter. Rob, did you miss me?

Rob Armstrong (1:55)

Desperately. It's great to have you back. I'm imagining you with a terrible sunburn and smelling slightly of that weird Greek liqueur.

Katie Martin (2:04)

I am a factor 50 girl, so not so much sunburn for me. But yeah, Greek liqueur in question, I think you're referring to is rackie, which is horrible and should not be drunk by humans ever. And I forget this every time I go to Greece.

Okay.

The Fed. So it was a bit of a weird run up to this meeting because of all of the 104 analysts that Reuters goes out and surveys to say, what do you think the Fed is going to do this week? All of them said, we think the Fed is going to be on hold. And indeed, it was on hold. Didn't change rates, left them in the region of three and a half to 3.75 percent. But the market was saying in the run up to this, effectively, we think there's a reasonable chance they might raise rates. We think this is not quite a coin flip, but we think there's a good chance that they will actually do this. So there's a bit of a sort of disconnect in kind of reading what people were expecting out of the Fed going into this. And then there's a big disconnect coming out of it as well.

Rob Armstrong (3:05)

On the going into the meeting side, I think what the market was responding to was that there is a perfectly solid case for raising rates here, which is not contrary to what you might read in the newspaper about the war and oil. It's about non-energy inflation, not getting back to the Fed's 2% target, being solidly over 3, trending sideways. And the fact that the new Fed chair at the last meeting said, the Fed is not going to take any nonsense from this inflation stuff. So between that comment and the facts on the ground, you can see why, you know, I thought they might raise rates before this meeting. I thought, you know, it was a defensible move.

It wasn't an obvious move, but it was a defensible move.

Katie Martin (3:54)

But the war in Iran doesn't help either. The fact that this just keeps not going away and you keep getting oil bouncing back up towards $100 a barrel, that doesn't help. I totally buy your argument that it's not all about that, but it is also about that.

Rob Armstrong (4:08)

Yeah, I think oil doesn't help in the sense that if energy, you shouldn't hike rates because you have a supply shock in oil. That would be a mistake, it wouldn't help. But persistent oil inflation does have a way of finding its way into inflation in other things.

So at some point, you say, wow, the oil price is starting to affect wages. And then, yeah, you do have to worry, it is the Fed's problem and it becomes an issue. I just don't happen to think we've gotten to that point quite yet.

Katie Martin (4:43)

We're not quite there yet. But so the reaction to the press conference that Kevin Warsh did, we'll kind of unpack that in just a little minute. But there was a big jump in long-term US borrowing costs. So 30-year bonds fell in price pretty hard. And suddenly, you've got the 30-year yield up at about 5.2 percent, the highest in 19 years. You've got the 10-year yield at 4.7.