In our June 30 Market Update, we spent time reviewing the first 45 days of Kevin Warsh’s term as Fed Chair. At the 100 day mark, with his speech at the Kansas City Fed Jackson Hole symposium, we got further confirmation of Warsh’s attitude towards guiding Fed policy.
As the world tuned in with rapt attention, Mr. Warsh explained that the economy was solid and the labor market was in good shape. He also explained several of his favorite indicators and ongoing research. He emphasized that the Fed would no longer provide forward guidance and would pay attention to the markets. In regards to meeting the inflation target, he said “we have work to do”. This comment was taken by the markets as a hawkish signal – meaning the Fed would need to take steps to reduce inflation. Normally that is accomplished with higher interest rates or shrinking the Fed’s balance sheet. He has clearly suggested that the latter is already in progress. That leaves increasing interest rates.
As background, the 10 Year Treasury Bond yield has increased from 3.95% in March to 4.70% today. The 2 Year has moved from 3.40% to 4.34% today (with 0.10% of the increase occurring after his speech). The 2 Year trades at the expected short-term rate over the next two years. 4.34% is quite a bit higher than the current 3 Month Treasury Bill yield of 3.80%.
Fed Funds Futures are indicating the most likely course is for higher rates every month through the end of the year. If Mr. Warsh is true to his discipline of “following the markets”, the market has given a clear signal that the Fed should raise its target interest rate.
The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.
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