A lack of Fed guidance and a market running on data
One of the dynamics that Warsh remarked on in his press conference following the announcement was a gradual rise in interest rates over the past month. He said that this move upwards in rates, without any published forward guidance from the Fed, could be evidence that markets are “playing the ball and not the referee.” Greenberg remarked that the Fed’s reticence under Warsh to publish forward guidance should coach markets into greater data-dependence, which can result in market-driven rate hikes without the Fed having to make a decision.
Greenberg notes that this dynamic of data-driven de-facto rate hikes can be challenging for markets in a stagflationary environment. However, he believes the Fed is happy to let this run because their focus is more on inflation risk than growth risk at the moment. The bias on the FOMC has moved, he says, when asked why we haven’t seen dovish dissenters to the decision the way we saw in the final meetings chaired by Jerome Powell.
While the Fed may be more tight-fisted with forecasting under Warsh, Greenberg doesn’t believe we’re returning to the days of Alan Greenspan’s chairmanship, when rate hikes might occur silently in the middle of the night. Fed leaders will still speak to media and even naming the dissenters, as was done with this decision, gives analysts some insight into where the Fed might go next.
What to expect from US fixed income now
Another dynamic in the US economy and US fixed income markets that Warsh remarked on was the ongoing capital expenditures by large technology companies in the US. This capex boom aimed at building data centres and AI infrastructure, is now being financed by large debt issuances on the part of major US tech firms. All that influx of corporate debt, along with continued bond issuances by the US government as its debt ratchets higher, should result in lower overall bond prices and higher interest rates. However, Greenberg also notes that we don’t actually know how much debt the market can digest. The dynamic, he says, is likely one of higher overall interest rates as well as higher rate volatility.
Higher resting interest rates, especially at the long end of the curve, should be helpful for investors seeking insurance against slower economic growth. However, he notes that if we see another stagflationary shock like the one that occurred in 2022, there could be a return to positive stock and bond correlations which Greenberg says may be better navigated by allocations to private assets than to fixed income.