Macro Matters: Less Fed talk 'could mean more volatility'

[00:00:00]The Fed holds, but it sounds hawkish.

[00:00:03]>> [music] >> This is Macro Matters, and we're talking the Fed. As expected, rates were held steady on Wednesday, but investors are braced for future moves to be more sudden as new governor Kevin Walsh dropped guidance on the future path of rates. A stripped-down monetary policy statement left traders pricing in a more than even chance the bank hikes in September, and possibly even in July.

[00:00:25]Odeta Kushi is deputy chief economist at First American. Odeta, what did you make then of Walsh's first meeting? The markets clearly concluded a hike could be coming pretty soon.

[00:00:35]>> Well, the new Fed governor the new Fed chair did certainly highlight the 2% inflation target and noted that price stability is is key at the moment. He did indicate that, you know, we're we're we're doing away with forward guidance, and I think that there are tradeoffs there. Forward guidance can be useful.

[00:00:55]It helps households and and businesses and financial markets understand how the Fed is thinking about the likely path of policy, but the risk is that forward guidance can become a little bit too powerful, and and markets may stop reacting to the economic data itself.

[00:01:10]And that's exactly what Walsh highlighted.

[00:01:12]>> What do you make then of the possible timing? How soon could that hike be coming?

[00:01:16]>> I think we would need to see a lot more evidence that inflation is broadening outside of just the energy market, and the recent Iran deal actually improves the situation a little bit. I think it unwound some of the inflation premium that was embedded in Treasury yields. We saw that happen earlier this week. Of course, some of that upward pressure came back after the hawkish hold, but certainly an Iran deal would help to ease the mind of FOMC participants about inflation re-acceleration in the second half of the year.

[00:01:49]>> Do you think then that markets have overdone their pricing of a hike given, as you say, that energy prices are falling now on that agreement between the US and Iran?

[00:01:56]>> It remains to be seen. I think we need to wait on more labor market data. Warsh classified the labor market as being stable, and it does seem from recent data points that the labor market is stabilizing and in some instances even showing signs of improvement. So, it it remains to be seen what the labor market does in the second half of the year and certainly what happens to inflation in the second half of the year, but markets were very quick to respond to the hawkish dot plot.

[00:02:23]>> Kevin Warsh didn't add any dot to that dot plot himself. He signaled less communication in the future. Does that mean that markets could be more volatile if they're surprised by future decisions?

[00:02:32]>> I think in the near term less guidance can mean mean more volatility, especially while markets adjust to a new communication regime. Uh hopefully that's smoothed out over time. The upside to removing forward guidance is we could see a little bit more policy flexibility and potentially better market price discovery.

[00:02:50]>> Wasn't necessary, do you think, for Warsh to focus on inflation concern given worries around the market that he might have been too willing to cut because we know that's what the president wants.

[00:03:00]>> Well, right now inflation is really the primary concern. With the labor market showing signs of stabilizing and the energy crisis pushing up uh CPI prices to the highest rates since since 2023, inflation really is in the driver's seat and Warsh reaffirmed several times throughout the press conference yesterday that price stability is is the key goal and the 2% in inflation target will remain in place.

[00:03:26]>> How is that language going to translate to the housing market then? Mortgage rates have already moved higher. This hawkish hold isn't great news for potential buyers, is it?

[00:03:34]>> That's right. And and Warsh himself mentioned that monetary policy is uneven. It's tight for housing, but less so elsewhere. Uh we've seen some volatility in mortgage rates. We saw an increase last week after the CPI and then a little bit of a decline after the Iran deal was announced and now back up.

[00:03:52]So, I do believe that the base case for this year is some volatility around a higher for longer rate, but even with mortgage rates at at a higher level than we would like, we're still seeing improvements in the housing market. Mortgage rates are still lower than year-ago levels.

[00:04:09]Inventory is in a healthier place and we are seeing that income growth continues to outpace house price growth nationally and that's allowing affordability to very slowly catch up and resulting in a little bit of a healthier housing market.

[00:04:24]>> Why do you think that is though? Why are we seeing movement given that as you say affordability still isn't in a great place for a lot of Americans seeking to buy a home?

[00:04:31]>> Well, inventory improvements are are very helpful because not only does it give buyers and sellers more choice, but it allows sort of a ceiling on price growth and that's what we're seeing.

[00:04:44]We're seeing that price growth is essentially flat nationwide and some markets it's even declining, especially in markets that have seen substantial growth in inventory. So, I think the inventory improvement is a big part of that. Some modest affordability improvements, it's bringing buyers and sellers off the sidelines. That's not to say that activity is back to normal.

[00:05:05]It's been a slow grind higher, but nevertheless exciting to see some improvement in the housing market.

[00:05:11]>> That was Odeta Kushi of First American.

[00:05:13]Don't forget you can watch more videos on reuters.com.

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