Joseph Wang, former senior trader for the Fed and commentator on the Federal Reserve, joined Jack to discuss the recent Fed meeting, chaired by Kevin Warsh, which included the first rate hike of Warsh's tenure. Wang expressed satisfaction with the outcome, having accurately predicted the hike after Warsh's Jackson Hole speech. He highlighted two key indicators from the speech: Warsh's belief that financial conditions were not restrictive and a new emphasis on the "speed" of returning to the 2% inflation target, signaling urgency.
The hike, according to Wang, is not a "one and done" event, initiating a new hiking cycle. This is supported by the dot plot, which median forecasts one more hike this year, and Warsh's communication. Warsh specifically noted that the FOMC found no one who believed financial conditions were restrictive, and he deliberately phrased the hike as "removing a dosage of accommodation," implying that conditions remain accommodative. Wang interprets this as a clear signal for at least two more hikes to reach a restrictive stance.
The market reacted hawkishly, with the two-year yield surging 12 basis points, a significant flattening of the yield curve, a dollar rally, and a sharp sell-off in risk assets like small caps, the S&P, and semiconductors. Wang noted this could be a smaller-scale repeat of the 2022 hiking cycle.
Wang attributed Warsh's hawkishness to several factors: robust economic growth, meeting the employment mandate (with unemployment at 4.1%), an unfavorable trend in inflation not declining quickly enough, and explicit concerns about geopolitical developments, particularly the surging energy prices due to the Middle East conflict. Warsh, Wang suggested, is trying to preempt potential second-round inflation effects.
Discussing the dot plot, Wang found the median 2028 federal funds rate projection increasing from 3.4% to 3.9% particularly significant, along with a slight bump in the longer-run projection to 3.2%. This signals a "higher for longer" scenario and a fundamental reassessment that the neutral rate is higher than previously thought.
On the topic of supply shocks, Wang explained the traditional central bank view of "looking through" them, but noted that continuous, successive shocks (pandemic, Russia-Ukraine, tariffs, Middle East) make this approach dangerous, risking unchecked inflation. This explains the Fed's current inability to ignore these shocks.
Wang reiterated his long-standing preference for the long bond, viewing it as a hedge against a perceived "tremendous equity bubble" and potential future rate cuts, or deflation from an AI revolution. He felt more confident in the long bond post-meeting, as Warsh demonstrated commitment to inflation control. While the long bond (TLT) saw initial gains, it pulled back, reflecting the market's complex digestion of the hawkish signals.
Regarding communication, Wang observed Warsh's evolving style: terse statements, a brief 30-minute press conference, and selective answering of questions. He speculated that the dot plot itself might be phased out in the future, citing Warsh's communications task force. The absence of balance sheet questions indicated current smooth functioning of reserve management.
Finally, Wang touched on Treasury buybacks, a policy he has tracked, noting their potential to influence yields. While Treasury official Besant's initial rhetoric created expectations for a "bazooka-like" intervention, the actual operations (only buying 4.5-5.1 billion out of a maximum 6 billion) disappointed the market. The Treasury's strict criteria, aimed at improving liquidity by buying only illiquid securities, prevented them from aggressively pushing down yields as the market had hoped. Wang also described the stock market as a "huge bubble," citing excessive leverage and an ingrained belief that assets will always rise.