US Fed freezes interest rates, but calls for hike emerge... "Market underestimates Warsh's hawkish stance"

▲ United States, Federal Reserve (Fed), Interest Rate, Dollar (USD)/AI Generated Image

Calls for an interest rate hike have re-emerged within the U.S. Federal Reserve (Fed). Despite the rate freeze, three committee members advocated for a 0.25 percentage point increase. Consequently, there was also an assessment that the market had underestimated the hawkish signals from Fed Chair Kevin Warsh.

Mohamed El-Erian, Chief Economic Advisor at Allianz, stated in an August 2nd (local time) interview with CNBC that the Fed's decision not to raise interest rates at this meeting was justified given the economic indicators. He explained that “there was no reason to raise rates at present,” and that Warsh maintained his existing stance of checking economic data, deviating from the traditional method of pre-committing to future policy directions.

In this decision, nine committee members voted for an interest rate freeze, but three called for a 0.25 percentage point increase. Lorie Logan, President of the Dallas Fed, stated that “inflation is likely to continue to exceed the target if there are no monetary policy constraints.” Beth Hammack, President of the Cleveland Fed, also reported that businesses are seeing price pressures spreading rather than weakening, and consumers are expressing despair over prolonged high inflation. Proponents of the hike argued that a small increase now could prevent a larger increase in the future, and that inflation originating from supply shocks would not disappear on its own.

Warsh drew a line at defining the decision to keep rates unchanged as a mere freeze. He stated, “If you ask whether the Fed explicitly changed the policy rate, I would say no, but that is only the beginning of the story, not the end.” Matt Peterson, Senior Economics Reporter at CNBC, assessed that the market perceived Warsh's remarks as more dovish than they actually were. In his opening remarks at the press conference, Warsh expressed his commitment to bringing inflation down precisely to 2% and also mentioned the possibility of the Fed reducing its assets to tighten financial conditions.

El-Erian also analyzed that Warsh was likely closer to the hawkish side among the nine members who voted for the freeze. However, he pointed out that the market's unease stemmed not so much from the immediate possibility of a rate hike, but rather from the disruption of investment practices that have long relied on the Fed's policy guidance. He stated that “the market has long formed an excessive interdependence with the Fed” and positively evaluated Warsh's challenge to that practice.

El-Erian explained that the recent rise in market interest rates originated from an increase in real interest rates rather than inflation expectations. He analyzed that large government budget deficits and bond issuances by tech companies simultaneously absorb funds, making an interest rate hike inevitable to attract investors. The Fed plans to assess inflation trends and the need for further tightening after reviewing two consumer price index (CPI) reports before its September meeting.

[Article Key Summary]

-Nine Fed committee members voted for an interest rate freeze, but three hawkish members called for a 0.25 percentage point increase to curb high inflation.

-Mohamed El-Erian assessed that while there is currently insufficient justification to raise rates, Fed Chair Kevin Warsh is closer to being hawkish than the market anticipates.

-It is analyzed that government budget deficits and bond issuances by technology companies are increasing demand for funds, which could lead to a rise in real interest rates and market funding costs.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*