The Fed: The Times They Are A-Changin’

The Federal Reserve on June 17 held rates steady, shortened the FOMC statement, and raised its estimate of inflation significantly while doubling down on a commitment to returning to a 2% inflation target.  

There are many things to talk about, but what do we really know?  Honestly, I think we know little at this stage.  We know the Fed created five task forces, and they will recommend change.  We don’t know what that change will be and whether it will be helpful.

Taking a page out of Fed Chair Kevin Warsh’s book: here’s a shorter response and sticking to the facts.

• No change in rates, no forward guidance, and no dissents

• The Fed raised its estimate of inflation this year notably to 3.3% core PCE.

• The Fed ended its statement with a double-down: “The Committee will deliver price stability.”

• Nine members believe rates will move higher from here. Warsh appears to have declined to submit a dot for the Summary of Economic Projections.

• For the moment, the Fed defines price stability as 2.0%

The Fed has its work cut out for it.  

Stepping back a bit, I believe we also heard four important points.

1. The Fed has a dual mandate, but only price stability matters today. I’d interpret this as the Fed is willing to tolerate higher unemployment to ensure we reach price stability and anchor inflation expectations.

2. I believe the Fed has shortened the timeline for returning inflation to 2%. Lower oil prices may buy a few months of softer inflation prints, but the Fed looked through the supply shock on the way up and will likely look through it on the way down.

3. I interpret Warsh’s creation of a task force focused on the Fed’s balance sheet and his related remarks as suggesting the Fed may not be as friendly toward markets looking forward, and he is more willing to tolerate financial volatility as the markets grapple with what the future will hold.

4. On data, the Fed already has many economists looking at nearly every official series, so the real shift may be how it ranks information, likely placing more emphasis on real-time indicators and less on backward-looking official data.

For me, this is a back-to-basics approach for the Fed.  However, creating five new task forces is daunting, and we have far more questions than answers.

‍

The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

Investors should consider a fund’s investment goal, risk, charges and expenses carefully before investing. The prospectus contains this and other information about the fund and can be obtained at www.AristotleFunds.com. It should be read carefully before investing.

Investing involves risk. Principal loss is possible.

Foreside Financial Services, LLC, distributor.