The Federal Reserve held interest rates steady at its July meeting, but the gathering was anything but quiet. Three members of the Federal Open Market Committee voted against the hold, pushing instead for a quarter-percentage-point increase. It was a level of dissent that drew attention across financial markets.
According to CNBC, the three dissenting votes all came from regional bank presidents: Lorie Logan of Dallas, Neel Kashkari of Minneapolis, and Beth Hammack of Cleveland. Their positions were not a complete surprise given statements each had made before the meeting.
Fed Chairman Kevin Warsh described the internal debate in pointed terms. "I asked for a good family fight, and I got one. That's the purpose. That's the design feature," Warsh said. "There was a lot more interaction between and among my colleagues. It was a real family fight."
The written statement released after the meeting was short and offered little new direction to investors. Warsh explained the approach directly. "As before, the policy statement conveys just the facts. It's steering clear of forecasting, a choice we consider especially prudent at these uncertain times," he said. "Uncertainty, however, does not mean a lack of clarity."
Warsh repeated the Fed's commitment to controlling inflation but made clear the process would take time. "We've got no magic wand," he said. "This isn't something that we're going to be able to carry out in days or weeks."
Markets did not respond well to the chairman's comments. Long-term Treasury yields surged even as the policy-sensitive two-year yield dipped. The 30-year bond yield rose 11.5 basis points to 5.211 percent, its highest level since 2007. The move suggested bond investors believe the Fed's current posture will allow inflation to build over the longer term.
Investors hoping for clues about the September 15-16 FOMC meeting got little to work with. The statement contained no forward guidance, and Warsh offered no clear signal on which direction he would push the committee. "So I take seriously that the pullback of forward guidance requires some transition. Reform isn't easy, but our general judgment is going to help us make better decisions, and in so doing, satisfy our remit," he said.
The September meeting now stands as the next major checkpoint. Whether the three dissenters can build enough support for a hike, or whether Warsh holds the line on a pause, remains an open question heading into August.
