Mum’s The Word: Kathryn Rooney Vera on Fed’s Second Meeting under Kevin Warsh, Plus Earnings Breakdown (Live Replay)

**Jack Farley** (0:00)
Wow, all right, we are here.
We are joined by Kathryn Rooney Vera, who's the Chief Market Strategist at StoneX Group. A lot of views on bond markets, everything in macro. I mean, we can get to currencies and bonds. Kathryn had a very strong call that the Federal Reserve would not hike today. The market thought there was like a 30% chance, or that was at least what was priced into the market. I happen to agree with you, Kathryn. I thought that those odds were far too high, and it appears that you were right. I mean, we know that you were right.
Congratulations on the good call. I wonder, why do you think the market thought that they were going to hike?

**Kathryn Rooney Vera** (0:37)
I think there's some historical precedent that a Fed chair that comes in, tries to prove his inflation fighting credibility and hike. There's also been some pretty good data in terms of resiliency here in the US. I think there was a combination of variables, but really 30%.
The surprising thing is that, Jack, usually just before a Fed meeting, the market is fully convicted one way or the other. Here it wasn't. I mean, 30% is kind of quibbling about whether or not it's going to happen. I talked to a few guys and gals saying 50% odds. But if you look at economists, they were broadly in favor of a hold, which is the category that I also fell in.

**Jack Farley** (1:17)
What did you make of the meeting? What were your broad conclusions?

**Kathryn Rooney Vera** (1:21)
I mean, it was interesting because the presser he revealed, or Chair Warsh, revealed very little, and you and I were talking beforehand, he kind of spoke at odds to his own statements here and there.
In and of itself, that messaging, in my opinion, is telling. He repeated focus on market pricing, implying that he prefers markets to shape the expectations, rather than the Fed attempting to lead them, but then said something a little bit different. I think that what we see in the market reaction is also very telling. We saw a sharp rise in the third year Treasury yield. I think investors are beginning to wonder if he's going to actually hike. This is a Fed that is fighting credibility issues for many years, many, many years, five and counting up, missing their 2% target with a lot of tough talk and very little action. So I think the 30 year Treasury yield speaks volumes. You see the 2 year dropping, 30 year moving higher. So you see that that's steepener. And if the committee doesn't eventually reinforce its rhetoric, Jack, I think that this could be yet another blow to Federal Reserve credibility.

**Jack Farley** (2:32)
So the long end of the bond market sold off, yields went up, the short end 2 year yields went down. So the market is pricing in fewer hikes, a more dovish policy in the short term. And as a result, the long end is saying, oh, if the Fed is not going to fight inflation, I mean, it doesn't matter how much Kevin Warsh talks, like if they don't actually raise rates, why do I own a 30 year treasury?

**Kathryn Rooney Vera** (2:53)
That's exactly what happened. And the markets prior to this meeting were forecasting a 90% chance of a rate hike by year end, and now that's been taken back. So yeah, the front end heard not happening, not today, not for the foreseeable future, and the back end heard inflation is going to be above 2% for the foreseeable future, and the Fed is losing inflation fighting credibility. So let's see what happens. I think that, I don't think it was a horrible presser.
I hear some other pundits saying he did very poorly, but Jack, I don't think that his lack of really divulging much information should come as a surprise. This is a Fed chair that was put in his seat, and in fact, you might have been at Dean Kernit's event a few years ago where he spoke, but Kevin Warsh has said repeatedly that his goal is to take an interventionist Fed to a laissez-faire Fed. So once the market stops talking about the Fed, that's where he declares victory. So he's pulling back the reins on communication. I think we should see more of that next year after he indicated he's going to continue status quo through year end.

**Jack Farley** (4:07)
So the world that we know so well, Kathryn, the world where the Fed is going to signal what it is going to do and is very open and transparent about how it's perceiving data and its potential reaction function, that data. That world we know so well, Kathryn. Honestly, think of it fondly. It no longer exists. That's what you're saying. So in this world where the Fed is not going to tell us any much, the info has been reduced 80-90 percent.