Today the Federal Reserve decided not to hike rates, but the hawks have moved their chess pieces: three Fed members wanted to hike rates at this meeting, which means September is in play for the first rate hike after the cut cycle ended. However, the long end of the bond market has already done the early heavy lifting for the Fed as hawks Beth Hammack and Lorie Logan won today and Fed Chair Kevin Warsh did a lot of gibberish talking. 

Now, with where the 10-year yield and 30 year yield are today, we know two things. First, we have to wait for the conflict to end in order to focus more on economic data, jobs and inflation. Second, if the conflict is over and jobs and inflation get softer, we might get a hold on a rate hike in September.

From the FOMC statement:

“The Federal Open Market Committee approved the following statement for release by a 9 – 3 vote:

“The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.

“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

“Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.

“Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.”

What Warsh said

Warsh stressed what I have been talking about: real yields and nominal yields have gone up recently, and that has done the heavy lifting for the Fed for now. Even though there wasn’t a rate hike today, I look at today as a victory for Logan and Hammack; the hawks got what they wanted and Warsh didn’t push back. With Warsh, all I saw was a man buying time and trying to convince the Fed not to hike because bond yields did their thing. 

Fed hawks got the triple crown before August came. Even with a softer inflation print and jobs missing estimates, they got three victories today:

1. They wanted the easing bias gone.
2. They want nominal and real yields higher.
3. They wanted rate hikes on the table.

This is Lorie Logan’s and Beth Hammack’s Fed for now, and the market went with them over the past two months, especially as the Iran conflict continues.

Conclusion

Today was a victory for the hawks: the 10-year yield and 30-year yield went up, but the 3-month yield went down for now as the rate hike didn’t happen today.

For now, the long end of the bond market does the heavy lifting. I imagine Warsh is hoping for the conflict in Iran to end before the next Fed meeting in September and that the next CPI inflation comes in light again. If that happens, then the long end of the market can head lower, but first things first: this conflict in Iran has to find a resolution and can’t reaccelerate.