He Doesn’t Have the Votes

Not investment advice.

Warsh is a lawyer and a politician, not an investor or economist, and after a few months it shows. The market is now whipsawing on his pronouncements rather than the solid economic analysis one looks for from a Fed chief. This week Waller, who was also up for the top job, publicly broke with Warsh and let us know that if next week’s CPI print comes in at expectations, both he and likely the majority of the committee will not vote to hike.

Warsh says odd things, and his economic analysis has obvious gaps.

Example #1, in the summer, in response to a question of whether the goal of the Fed is still to get inflation to 2%, Warsh answered:

“Yeah, so, I’ll give two answers. First let me give the proper standard answer. The Federal Reserve every January outlines a statement of purposes and strategy, and in that strategy document… it describes a measure of PCE inflation as the objective function there… so that’s our number, we’re sticking with it. Who knows come after next January what we might say about strategy.”

Adding “who knows” is more designed to grab attention than sober analysis.

Example #2, in his Senate testimony Warsh said

“We used to use core PCE core measures, so we’d exclude food and energy because it was sort of a rough swag as to what was going on. We don’t have to do a rough swag anymore.”

SWAG stands for “scientific wild-ass guess.” Again, this is not careful analysis. Contrast this with how Alan Greenspan described disinflationary pressures in 1999.

“The enhanced competition in tradable goods enables excess capacity previously bottled up in one country to augment worldwide supply and exert restraint on prices in all countries’ markets.”

Warsh example #3, his Jackson Hole speech:

“Looking over just the past six months, the conclusion is similar: Of goods and services in the PCE basket, 49 percent showed annualized price increases above 3 percent. Again, this is well below the post-pandemic highs but still quite elevated.”

This is bad analysis. Goods prices were hit by tariffs that are now dropping out of the sample. He also said wages do not have a close relationship with inflation.

Contrast Warsh’s words with what Waller said this week:

“To set the stage before we talk, let me give you a sense of my thinking, as of today, about the economic outlook and the implications for monetary policy. The short version is that, while inflation remains meaningfully above the Federal Open Market Committee’s (FOMC) 2 percent goal, recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”

This is clear, declarative logic. Moreover, Waller explicitly calls out Warsh’s odd effort not to share views about the future.

“By way of wrapping up, I want to speak about central bank communication, which I consider an essential part of the monetary policy process.” I added the bold to make a point; he is saying Warsh’s approach is not appropriate.

When I count the votes, Warsh doesn’t have them to raise rates, absent a big surprise on CPI next Friday. This leaves me bullish short term rates, bearish the belly of the curve, long stocks and long gold. I also worry about the Fed as an institution.

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