Warsh's First Fed Meeting, U.S.-Iran Deal In-Focus

**Keith Lansford** (0:05)
Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.
I'm Keith Lanceford, and here is Schwab's early look at the markets for Wednesday, June 17th. Kevin Warsh is expected to take the stage this afternoon for his first press conference as Federal Reserve Chairman. While investors don't expect a policy change at this meeting, what Warsh and other policymakers put into their interest rate dot plot and economic projections could help reset market expectations. The last time the Fed offered a dot plot, which tracks policymakers' expected rate path over the coming years, it baked in one rate cut in 2026 That's likely to no longer be the case, as inflation has risen substantially since March when that data came out. The median dot plot in the dot plot will likely show no change in Fed policy by year-end, said Colin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. We know from comments from various officials that there is very little appetite for a cut in the near term. Another thing to watch is the policy statement due at 2 p.m. Eastern time. Last time out, three policymakers dissented on the pause decision, calling out what they said is easing bias in the statement. They wanted a more neutral bias, suggesting rates could go up or down depending on economic trends. The new statement could reflect that. Warsh's words and tone in his first press conference as Fed Chairman will also be examined closely for clues on how he'll oversee the Central Bank's dual mandate of stable prices and maximum employment. Any comments on how Warsh will handle public communications will be particularly noteworthy. Warsh has said he thinks the Fed over communicates. He is not a fan of the Fed's forward guidance, which he thinks makes it harder for committee members to pivot if economic circumstances change, said Michael Townsend, Managing Director of Legal and Government Affairs at Schwab, noting that Warsh is not even committed to holding a press conference after every FOMC meeting. I do not expect dramatic announcements tomorrow, but it will be interesting to see what signals Warsh sends. The odds of the Fed standing pat-on rates today are over 99 percent, according to the CME FedWatch tool. However, looking farther out, futures trading puts the chance of a hike by the end of the year near 60 percent. That's down slightly from last week before the news of a possible U.S.-Iran peace deal. The expected formal signing of the peace deal with Iran is scheduled for Friday when US markets are closed for Juneteenth. This deal is key to reopening the Strait of Hormuz and allowing the flow of oil to eventually return to normal. Crude oil futures trading has prices falling from here through the end of the year, though it's questionable how quickly trapped supplies can get where they were originally headed. Even if the Strait reopens on Friday as planned, it will take time before things return to normal, said Townsend. Mines must be cleared from the Strait, shipping companies will need to restart their vessels, and oil production in the region will need to ramp back up. It's likely to be months before things are back to the way they were before the war began in February. Also, European and US oil stockpiles are quite low and likely need to be refilled over the coming months. This extra demand could slow the expected decline in prices, even if the Middle East stays calm. Futures trading projects crude oil to fall about 10% from current levels to near $72 per barrel by next winter.
Turning away from geopolitics, the Bank of Japan announced a 25 basis point rate hike to 1% on Tuesday, an expected move that pushed Japanese rates to their highest level since 1995 Japan continues to fight inflation and a weak yen, and the BOJ made clear it's ready to hike again if necessary. The Bank of Japan hiked rates but paused the tapering of bond purchases, said Michelle Ghibli, Director of International Equity Research and Strategy at the Schwab Center for Financial Research. Pausing the taper was expected. Meanwhile, hiking rates while continuing to purchase bonds sends a mixed signal. Continued yen weakness indicates that the market may believe the BOJ needs to be more aggressive in tightening policy. Ghibli noted that there are signs BOJ officials view inflation as more of a risk than economic weakness, which could lead to a quicker pace of hikes moving forward.
In Economic News Tuesday, May housing starts and building permits provided a mixed picture. A 15 percent monthly decline in May housing starts was well below consensus views. Building permits also fell 0.7 percent month over month, but slightly topped analysts' expectations. Separately, import prices rose 1.9 percent in May, but were up just 0.8 percent after subtracting oil prices. That's down from an upwardly revised 2 percent in April. Export prices rose by 1.3 percent in May, down from 3.5 percent in April, but slightly ahead of expectations.