▶ Full Post Text
FOMC Preview
**The Tragedy or Comedy of Inflation (fyi – Hamlet is a tragedy)**
**Act I: The Triumph**
The curtain rose on the June FOMC press conference with Kevin Warsh cast in the leading role. Stepping confidently to center stage, he delivered a performance that financial markets had long been waiting to hear. No excuses. No appeals to forces beyond the Fed's control. The 2% inflation target, he declared, was the Federal Reserve's responsibility and the Federal Reserve's alone.
The audience applauded. Currency traders sent the dollar higher. Bond investors flattened the yield curve. For a moment, markets suspended disbelief and bought into the story. Warsh had not yet slain inflation, but he had convinced the audience that the hero understood the plot and intended to see it through.
The first act ended to rave reviews.
**Act II: The Sequel**
By July, the stage was set for the next installment. The July FOMC left rates unchanged, a development that surprised few in the audience. Markets had assigned only modest odds to a hike and were prepared to move on.
But sequels are judged less by what happened than by whether the lead actor can sustain the performance.
As reporters repeatedly prompted Warsh to explain how the bold promises of Act I would be translated into action, the script became less clear. Questions that invited conviction received ambiguity. Opportunities to demonstrate resolve yielded cautious and noncommittal answers. The commanding protagonist of June seemed to lose the thread of his character.
The audience noticed.
Investors began to wonder whether the stirring rhetoric of the opening act would be matched by the difficult decisions required to return inflation to 2%. The market's verdict was swift: the dollar retreated, long-term Treasury yields rose sharply, and the glow of June's standing ovation gave way to a more skeptical review.
The play is far from over. But after two acts, markets remain uncertain whether Warsh is merely delivering a convincing performance or preparing to follow through on the script he wrote for himself in the opening scene.
**Act III: To Hike or Not to Hike**
The Scene: The Eccles Building. A meeting chamber.
*Enter WARSH, alone, with inflation reports in hand.*
**Warsh:**
To hike, or not to hike, that is the question:
Whether 'tis wiser in the mind of Fed
To suffer still the sting of stubborn prices,
Or take up rates against inflation's tide,
And by one further move oppose them.
To hike, to pause,
No more; and by a pause to say we end
The heartache and the thousand market fears
That tighter policy is heir to.
'Tis a consummation devoutly wished by Wall Street.
To pause, perchance repent. Ay, there's the rub.
For in that pause, what inflation may return
When vigilance hath left the stage, must give us pause.
There's the respect that makes policymakers cowards of us all.
*Enter the Ghost of Volcker.*
**Ghost:**
Remember me.
**Warsh:**
Alas, poor credibility! I knew it well.
Won in a moment, lost in an instant.
In June, my words were steel.
The audience applauded.
The dollar marched proudly forth.
The yield curve bent its knee.
Yet in July, when asked what deeds should follow words,
I answered with clouds and shadows.
Then markets questioned whether conviction dwelt within the castle walls.
*The Ghost departs.*
And now the hour approaches.
Shall the Committee hike?
Perhaps.
Shall the Committee pause?
Perhaps.
The deed itself matters less than the tale that follows.
For if we hike and hint the battle continues,
The audience shall see resolve.
If we pause and warn that further action may come,
The audience may yet trust the script.
But if we pause and speak as though victory is won
While inflation still draws breath,
Then confidence may exit stage left,
Accompanied by a weaker dollar and rising long-term yields.
Thus guidance is the thing.
Not promises carved in stone,
Nor prophecies of future meetings,
But a solemn declaration that the Kingdom of 2%
Remains the object of the quest.
The play's great challenge is not whether one hike occurs,
But whether the audience believes
The actor will do what the script requires
When the next difficult scene arrives.
*Enter the Chorus of Policymakers.*
**Chorus:**
Words won in June.
Doubts filled in July.
Today, we ask but one question:
Not whether the Fed can hike,
But whether it will.
For what vexes the Committee is not recession's specter,
Nor crisis lurking at the gate.
The labor market yet stands tall,
Its battlements largely intact.
The citizenry remains employed,
Wages still advance,
And commerce has not abandoned the realm.
Yet inflation, though diminished from its former tyranny,
Refuses to yield the throne.
And now omens darken the horizon.
Upon the distant Strait of Hormuz, conflict stirs.
Merchants whisper of disrupted passage and threatened supply.
The bell rings. The Committee votes.
**Warsh:**
The readiness is all.
*Exeunt. Curtain falls, awaiting the market's verdict – slow clap leading to thunderous curve flattening applause or steepening curve of rotten fruit thrown from the cheap seats…*
**Act IV: Something is Rotten in the State of Government Finances**
*Enter Secretary Bessent*
To be continued…