How CFOs should digest the Fed’s continued rate holds

Like a kid who talked a big game right until it came time to jump off the high dive, Federal Reserve Chair Kevin Warsh is likely learning in real time the big difference between saying you’ll do something and actually doing it.

You’ve already heard the news: Last week, the Federal Open Market Committee voted to keep rates steady. (Again.) Now that the dust has settled, it’s time to take a closer look at what we really learned from the Fed’s latest meeting and what CFOs might take away from it.

Talk the talk. Warsh has previously said the Federal Reserve under his command will focus on “more thinking, less talking.” He was quickly true to his word: In Warsh’s first meeting as chair in June when the committee also held rates steady, he noted that the Fed’s released statement was “a bit shorter, a bit simpler” and it scrapped “so-called forward guidance, which [the FOMC] agreed was not well suited to the current policy conjuncture.”

Yet for all the talk of not talking (or at least, talking less), it was Warsh’s previous comments that largely shaped the negative market reaction to the FOMC’s latest hold, experts said.

“He sounded very strong on inflation, talked very tough on the fact that the Fed is responsible for inflation performance, that he wishes to see inflation come down, and that the buck stops with him, essentially,” Derek Tang, an economist at MPA Macro who forecasts Fed policy developments, told CFO Brew. “You can have really good intentions and say the right things, but at the end of the day, the market needs to believe you.”

Gregory Daco, EY-Parthenon’s chief economist, told us: “Markets are running thin on patience when it comes to a Fed chair that talks a big game in terms of resolute commitment to price stability, but then, when asked why they wouldn’t tighten, doesn’t provide any form of response…You have a Fed chair that is sounding very hawkish and determined to bring about price stability…and yet does not seem to be willing to deliver any form of policy tightening in the near term. That’s a strong paradox.”

What now? Warsh seems to want to talk even less: Not long after the July 29 Fed decision, the New York Times reported that Warsh is considering scaling back the number of regularly scheduled rate-setting meetings at the Fed, which—particularly when coupled with the lack of forward guidance—would amount to a profound shift for the US central bank.

But this is a team sport. Warsh has previously expressed his desire for “a good family fight” between FOMC members as they determine rate policy. The problem now is that he might actually get one.

In the most recent FOMC meeting, three members dissented from the vote to hold rates steady, wanting instead to raise them. While dissent is hardly groundbreaking, what’s more notable is that it seems possible “the debate [will] spill into the open” in the coming weeks, Tang said.

“The communication void from the Fed chair has opened the door to a chorus of Fed policymakers’ speeches and even unusual ways of communicating,” Daco added, citing things like a LinkedIn post from Beth Hammack, president of the Federal Reserve Bank of Cleveland, about why she was in favor of raising the Fed funds rate.

That kind of communication is “unusual…outside of periods of crises,” Daco said. “These sudden moves…are indications that the void left by the chair is being filled by his colleagues.”

Something borrowed. So, what should CFOs make of this moment of change at the Fed? “For CFOs, what is important beyond the Fed’s next move is how the cost of capital is going to evolve in terms of longer-term interest rates,” Daco said. “Those matter more for business investment decisions, hiring decisions, leverage decisions.”

“If you have a US central bank that’s not willing to give forward guidance, [and] is fine with the uncertainty percolating in financial markets…as of now, [that] means that at the longer end of the yield curve, US interest rates are going up,” Tang said.

That will mean it’ll cost companies more to borrow, he noted, and “it might also be a quantity issue in addition to a price issue. It might not just cost them more in interest, it might also make banks think twice about what the stability of US policy is going to be over a longer time horizon.”