The Fed’s silent treatment

Katie Martin (0:06)

Pushkin.

It looks like the US war with Iran is back on. The US is dropping bombs on Iranian infrastructure, and Iran has been firing on commercial shipping in the Strait of Hormuz. Here we go again. Donald Trump has declared that as far as he's concerned, the ceasefire is over. Now markets are a bit spooked. Oil is up about $80 a barrel. It's not like March, but the question is, is this enough to push inflation up and force the new chair of the Federal Reserve, Kevin Warsh, to raise interest rates after all? Today on the show, it's war and Warsh.

This is Unhedged, the markets and finance podcast from the Financial Times. And Pushkin, I'm Katie Martin, a markets columnist at the FT in London. Joining me down the line from Brooklyn, New York, is Rob Armstrong off of the Unhedged newsletter. Rob, who are you supporting in the football now that the US is out?

Rob Armstrong (1:09)

The Britain Soccer Cats, out of allegiance to you, Katie. I have a lot of friends over there.

And because of that, I'm rooting, I'm hoping that it comes home briefly before it goes back to France.

Katie Martin (1:25)

Okay, good. Thanks. Thank you for your service.

So, God, war again, really? Why? What's going on?

Rob Armstrong (1:35)

Well, I think, you know, we now have learned that Trump announcing that the ceasefire is over, tells you that the ceasefire is over right now on Thursday at 9:46 a.m. Eastern Time. But it doesn't tell you very much about whether the ceasefire will be over on Friday.

Even saying that, the fact that missiles are being shot and shipping is being disrupted has to change your calculus of the situation, even acknowledging that it could all be different tomorrow. So it matters.

And look, oil is telling you that it matters some. You know, we had a whatever 5% raise, a 5% increase in the price of rent yesterday. And that shows you that despite the vicissitudes of this conflict, you have to take it seriously. When the missiles start to fly again.

Katie Martin (2:25)

Yeah. I mean, cynics were saying right from the start that the ceasefire wasn't worth the paper it was written on, if indeed it was ever written on any paper in the first place. So it's not a huge surprise. But so there's a few interesting things going on here. As you say, oil is back up about $80 a barrel. It was getting close to about 70 So, you know, we had a decent move higher. And one of the things that happened earlier this week was when this all kicked off again, is that government bonds took a knock again. Because listeners to this show well know, when you get higher oil prices, all things equal, you get higher inflation. Bonds really don't like inflation. So that pushes the price down and it pushes the yield up and it pushes borrowing costs up for everybody. And it's generally bad. And we've had another flicker of that over the past few days. And that kind of collides with another big market event that we've had this week, which is the minutes from the first meeting of the Federal Reserve under the new chair, Kevin Warsh. And we'll come on to the details of that in a minute. But what investors are saying, to me at least, is, okay, we understand that Kevin Warsh wants to say less.

Like, arguably we should all say less. You and I should possibly shut up. But Kevin Warsh...

Rob Armstrong (3:41)

People have been saying this to me for some years now, Katie.

Katie Martin (3:44)

Well, one of the things people say to me about why they like this show is that it's short. Just make that what you will.

Rob Armstrong (3:52)

The food is lousy, but at least the portions are small.

Katie Martin (3:57)

So Kevin Warsh likes saying less, all power to his elbow. But one of the things that means is that investors kind of don't know how to read him, and they don't know how to read the Fed. And they don't know whether this kind of pop higher in oil prices means they need to think again about what they think the Federal Reserve is going to do next, whether it needs to raise interest rates. So we're just sort of in this sort of soup of confusion and trying to double guess what the Fed does.

Rob Armstrong (4:28)

Well, take a step back, because I believe, and I think a lot of people believe, that for Kevin Warsh, the confusion and the volatility is somewhat the point. I think of his, or one part of his kind of philosophy of finance and economics over the last 15 years is that it has been anesthetized by a Fed that is too activist and a government that spends too much money, and there needs to be kind of more free market, free for all, laissez-faire, what have you, especially in financial markets.