A New Sheriff in Town

On Wednesday, September 16 the FOMC (Federal Open Market Committee) led by newly appointed Chairman, Kevin Warsh voted to raise the fed funds rate for the first time in three years. In Sheriff Warsh’s opinion, inflation is enemy number one, and he rounded up a posse to give chase. All his deputies voted unanimously to increase the rate by 0.25%, and 16 of the 18 officials who submitted projections penciled in at least one more increase before year-end. Financial markets rallied initially but sold off later in the day with the 10-year Treasury note closing above 5% for the first time in over 19 years. Stocks also ducked for cover with major indexes falling on the day.

President Trump has been calling for lower rates for some time, so investors have been wondering if Warsh would do Trump’s bidding. As it turns out, the Sheriff demonstrated he is his own man. In remarks to reporters Wednesday afternoon Warsh said, “Inflation is too high and has been for too long.”  He later stated, “Today’s action starts to show that we’re serious about this.” Inflation remains above the Fed’s 2% target for many reasons, including high oil prices from the war with Iran, a robust economy, and an unquenchable thirst for debt by companies racing to win the AI race and our own government’s gargantuan deficit spending.

When the year started, the consensus opinion was for a rate reduction, but then came the afore-mentioned influences, tempering expectations. Inflation has remained above target for five years and with no end in sight to the war with Iran, the FOMC has decided it is time to act. Many investors are no longer asking if we are in a “higher-for-longer” period, but instead, if this is the beginning of a cycle of increasing rate hikes. It’s starting to look like it, but no one knows for certain so we must wait to see if the Sheriff and his posse can chase inflation into hiding anytime soon.

Stay tuned.