The Federal Reserve stands still, but three negative votes release hawkish signals, and the outlook for monetary policy is still vague

The Zhitong Finance App learned that in the early hours of Thursday morning, Beijing time, the Federal Reserve announced that it would keep the federal funds rate target range unchanged between 3.5% and 3.75%, in line with overall market expectations. This is the fifth time in a row that the Federal Reserve “stands still.” Before the Federal Reserve announced this interest rate decision, the market had expected a 30% chance of raising interest rates by 25 basis points.

Although the Federal Reserve did not raise interest rates this time, one of the notable features of this meeting was the sharp increase in the number of negative votes. Three members of the US Federal Open Market Committee (FOMC) opposed keeping interest rates unchanged and advocated raising interest rates by 25 basis points. All negative votes came from regional Federal Reserve presidents, including Dallas Fed President Lori Logan, Minneapolis Federal Reserve President Neil Kashkari, and Cleveland Fed President Beth Hammark. However, in light of the public statements made by the three in the past, this result was not surprising.

Regarding these three negative votes, Bob Michelle, chief investment officer of J.P. Morgan Asset Management and head of global fixed income, said that this was one of the most interesting signs when the Federal Reserve decided to keep interest rates unchanged, indicating that the pressure to raise interest rates is likely to continue. Michelle said, “In the statement, the three negative votes are even more important. It shows that they are beginning to shift to tighter monetary policy.”

Jim Bianco, president of the macro research agency Bianco Research, also said, “A negative vote is the most important thing.” He pointed out that since Federal Reserve Chairman Walsh avoids providing forward-looking guidance, the traditional post-interest rate decision press conferences now probably reflect more the personal views of the Federal Reserve Chairman rather than the position of the entire FOMC. He added that under unprecedented pressure from US President Trump, Fed policymakers are sending signals that they are willing to continue to maintain their independence.

KPMG chief economist Diana Swank said that some Federal Reserve governors may already be considering supporting future interest rate hikes internally. “These negative votes did not appear in isolation.”

After the Federal Reserve announced the interest rate decision, the US stock market experienced turbulence — first soaring, then plummeting, and taking back previous gains; US Treasury yields once fell to an intraday low, then rebounded to close to the level before the announcement of the resolution. The 10-year US Treasury yield was about 4.63%.

Bianco said that since Walsh is determined to reduce the Federal Reserve's external communication, the market may be constructing its own policy narrative. He pointed out, “The old adage I've always quoted is that when the Federal Reserve starts to panic, bond traders can relax or stop panicking.” “Perhaps a slight degree of panic at the Federal Reserve will eventually greatly help the bond market to stop this upward trend in yield.”

In addition to the three negative votes, the Federal Reserve continued the “mystery” that had existed since Walsh took office — this policy statement had neither forward-looking guidance nor revealed the Fed's policy response framework, and Walsh's statement of policy tendencies at the press conference was also very vague. “I am fully aware that reducing forward-looking guidance will require a transition period,” Walsh said. Policy reform is no easy task, but we are able to better fulfill our statutory duties by relying on comprehensive research and judgment to make decisions.”

At a time when many investors are trying to find clues and determine whether the Fed will raise interest rates at the September meeting, the Federal Reserve got them nowhere. Following this interest rate meeting, Walsh's next important agenda item is the Jackson Hole, Wyoming Global Central Bank Annual Meeting, which will be held from August 27th to 29th. Normally, the Federal Reserve Chairman will use this seminar to outline the medium- to long-term policy framework. However, Walsh said that the keynote speech is still “completely blank.”

Furthermore, at the press conference, Walsh reiterated the Federal Reserve's determination to control inflation, while reminding the market and the public that the path to curbing inflation is difficult and cannot be achieved overnight. He said, “We don't have a one-size-fits-all solution. The problem of inflation cannot be solved in just a few days or weeks.”

When some reporters thought at the press conference that this resolution was a “suspension of interest rate hikes,” Walsh did not agree. He said, “I wouldn't call this operation suspended. I define it as an in-depth assessment of the current state of the economy. It is a careful examination of a series of major problems, and it is also a core topic that clarifies what we need to solve for some time to come.” He added that the Federal Reserve's choice not to adjust interest rates at this time is only the beginning of the policy process, not the end point. Some analysts pointed out that Walsh's statement almost actively prevented the market from interpreting “no interest rate hike” as “policy peaking.”