Episode Details

Our Global Head of Macro Strategy Matthew Hornbach and our Chief U.S. Economist Michael Gapen discuss the signals investors will be seeking from the new Fed Chair leading his first monetary policy meeting and possible implications for markets.

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Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. 

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. 

Matthew Hornbach: Today, markets are watching the Fed's next move. Are rate cuts delayed or could hikes possibly be back on the table? 

It's Tuesday, June 16th at 8:30am in New York. 

So, Mike, the FOMC meeting today and tomorrow is likely more about reading the signal rather than announcing a rate change. Markets will focus on inflation forecasts, the unemployment rate, and the growth outlook. But, of course, this will also be the first meeting after Powell ended his term as Fed chair in May. All eyes will be on Warsh. 

So, what are your thoughts before the press conference? 

Michael Gapen: A lot of thoughts, actually, before the press conference. I do think it's basically a foregone conclusion that the Fed will be changing its easing bias in favor of more neutral language. Seems clear the committee wants to do that, probably wanted to do that at the last meeting. And it does fit, I think, Warsh's preference for less communication, less guidance from the Fed. So, I do think that's largely a foregone conclusion, although obviously we need to see whether that happens and whether there are dissents. 

I think, as you noted, the forecasts will be important, but I think what's really important from my perspective – more than the modal outlook or the baseline that participants have – is their assessment of the balance of risks around the dual mandate. And I say that because obviously a year ago, the Fed eased policy when it felt that there were downside risks to the labor market that outweighed upside risk to inflation. 

This year, that seems to have flipped, where the labor market appears to have stabilized, labor demand has picked up a little bit, and it is inflation that looks persistent. So, if the Fed cut last year on downside risk to the labor market, I think the concern for markets is – maybe they hike in 2027 or later this year based on a changing balance of risks in the direction of firmer inflation. 

So, for me, that's really kind of key. In addition to what they're saying about growth inflation in the labor market, what is their assessment of the distribution of risks around that modal forecast? 

Matthew Hornbach: There's definitely going to be a lot of investor interest in the press conference itself. What exactly may result from the opening statement. Presumably, Chair Warsh will give an opening statement. 

How are you thinking about the back and forth between Warsh and the reporters that are asking questions? Are there certain questions that you would anticipate him getting asked, and how do you think he might respond? 

Michael Gapen: Well, I think certainly that if we are correct, and I think markets are correct, that they do change forward guidance in the statement to more neutral bias, that certainly opens up the possibility that the Fed will be hiking. 

So, the obvious first question is – is this the first step in the direction of hiking? What would get you to raise rates? Should investors be thinking about that? Is that the course of travel here? 

Now Warsh may not want to answer that if he, kind of, is consistent in the view of saying the Fed shouldn't give a lot of forwar