News alert: Fed acts normal

Katie Martin (0:00)

Finally, something normal has happened. It really feels like it's been a while. US inflation is too high, and the Federal Reserve has done the normal thing that normal central banks do when inflation is too high and raised interest rates. Phew! It's the first move like this from the Fed in three years. Now, in fairness, this is something my co-pilot Rob has always said would happen, and I expect him to remind us of that roughly four million times during this podcast.

Donald Trump, obviously, is pissed off, and he's saying the usual stuff about how rates should be much lower. But it really feels like we are learning to ignore him. So today on the show, it turns out the Fed does have the guts to raise interest rates just before the midterm elections after all. Thank Fed for that. Are we heading for a period of sanity?

This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist locked in an underground lair at FT Towers in London. Joining me down the line from New York City is non-robot human Mr. Robert Armstrong. Rob, this is nice, isn't it, talking about normal things like normal people?

Robert Armstrong (1:16)

It is a big relief. And I think relief is the appropriate response. But as you already pointed out, the appropriate response from me is shouting about how right I was all along. Yeah, that is reference number one of 4 million.

Only 3,999,000 more references to how right I was to come in the show listeners.

Katie Martin (1:39)

Yeah, exactly. Now, normally, I would say a high inflation, rise in interest rates, this sort of doesn't rise to the level of being something we need to do a podcast about it. This is just how the world works. But these are obviously extraordinary times. So what actually happened?

Robert Armstrong (1:59)

The Federal Reserve Open Market Committee decided to raise interest rates by a quarter of a percentage point for the first time in several years. And just as importantly, the committee voted unanimously to do so, which wasn't at all clear they were going to do going into the meeting.

Katie Martin (2:18)

No, I think people were expecting some sort of split there, right? But no, they were like, we move as a pack on this. We all agree a quarter point rate rise is the right thing to do.

But beyond just the absolute basics, there's a lot of like nitty gritty that markets people like to sort of unpack around what the Fed does and says. Two main things that I think were important to people here is this thing called the dot plot, and then also communication. Like, what did Kevin Warsh say, and what did he indicate about what's happening next?

Robert Armstrong (2:53)

Well, on the dot plot, which just to remind listeners, is this graphic that the Fed puts out sort of every other meeting, which shows for each member of the Monetary Policy Committee, what they think the appropriate policy rate is going to be at the end of this year and for several years to come. Kevin Warsh, I will flag right here, objects to the existence of this thing and does not participate in it.

Katie Martin (3:20)

He's not playing.

Robert Armstrong (3:20)

But the rest of the committee is participating. And their dots showed that another rate increase was coming this year, and they showed some general firmness of mind about the years to come.

So this was not only an increase, it was a hawkish increase.

Katie Martin (3:37)

So what they could have done is said, okay, we're going to raise rates this one time, then we probably won't do any more after that. And that is not what they've done. They've said, no, we're on a mission here, we are going to bring this inflation down.

Robert Armstrong (3:49)

Kevin Warsh's view is you should never say anything about your next move. And he didn't.

But he was quite affirmative that everyone concluded that they needed to raise rates this time. And he said, you know, the economy looks strong, we're not worried about employment. Once again, inflation is simply too high. He sort of said, this was an easy decision, which sent that message that implicitly, we might not be done here.

Katie Martin (4:25)

I was going to ask, because this is the whole thing with Kevin Warsh and his communication style, is that he's been quite insistent that he doesn't like forward guidance, he doesn't like spoon feeding the markets and telling them what is coming next. And so he has said, I'm not playing your stupid dots game, I'm not playing pain the tail on the donkey, I'm not putting a dot on this, what's it called? It's the economic projections doodad.