The Piton Investment Team, as part of its weekly meetings, regularly checks on signals from, and decisions by, the Federal Reserve (for details on how and why, see the March 13 blog entry at https://pitonwealth.com/investment-resources/following-the-fed-article/). The Team takes no position on what role the Federal Reserve should or should not play, but they do find value in understanding what impact the Fed’s decisions have on the economy and on markets.
Today’s meeting happened to mark one hundred days since Kevin Warsh became the current Fed Chair, and he had just given a public speech, so it seemed a good moment to reflect on his perspective on the role of the Fed. There had been consternation about the direction of the Fed under Warsh, driven in no small measure by disagreements between the previous Fed Chair, Jerome Powell, and President Trump, some of which were aired quite publicly. Given that President Trump had advocated openly for the Fed to lower interest rates, would Warsh lead an effort to lower rates, possibly further empowered by other Fed members supported by the President?
So far, the Fed has mostly held rates stable, but Warsh has spoken publicly about ways that he believes the Fed should do its work somewhat differently than it has in recent years. (You can read the full text of his speech this morning at https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm).
In key ways, Warsh asserts his commitment to the Fed’s double mandate, of combatting inflation and supporting employment. In this context, his focus is on inflation, where he hopes to address issues that are still driving inflation above the Fed’s stated goal of 2% annually. In a departure from recent Fed practice, however, he states unequivocally that the Fed should back from offering “forward guidance,” a measure he characterizes as implemented (wisely) as an emergency measure put into practice in the throes of the 2008 Financial Crisis, but which no longer serves its positive purpose (for the Fed’s definition of this forward guidance, see https://www.federalreserve.gov/faqs/what-is-forward-guidance-how-is-it-used-in-the-federal-reserve-monetary-policy.htm).
The Piton Investment Team takes this perspective as meaning Warsh prefers the equities markets to make decisions with little to no guidance from the Fed. Since the markets invest in a forward-looking manner, if the Fed declares the future direction of interest rates, investors have reason to factor those expectations into their calculations. Warsh apparently prefers that investors not look to the Fed for guidance in such calculations and that the Fed make decisions on a short-term basis rather than in steps on a longer-term path. If the Fed’s decision making does prove to operate this way and investors in turn adjust their calculations, then the Piton Investment Team can adjust accordingly what they might anticipate from the markets. Broadly speaking, this could mean that investors would place less weight on what they expect of interest rates in the future. Such adjusted calculations can favor some types of businesses more than others (depending how much debt they tend to have and hence their susceptibility to interest rates). In any such scenario, the Team has faith that there will be opportunities to pursue on behalf of Piton clients’ portfolios. Keep reading the Team’s blog to see follow their continued diligence in service to Piton clients!and update their portfolios, always with the goal of maintaining portfolios that serve the client’s goals the best.