Kevin Warsh-led Fed leaves US rates unchanged; could it impact India?

The Federal Reserve's new chairman, Kevin Warsh, in his first policy statement on Thursday announced no change in US lending rates, keeping the funds range at 3.5-3.75 per cent. Warsh takes over from Jerome Powell, who stepped down from the top helm of the US central bank in mid-May 15.

The American central bank's June statement had new quarterly projections that indicated nine out of its 19 policymakers now anticipate a rate hike by the end of the year.

Under Warsh, the policy statement was much shorter and removing remarks that had been used to indicate the likelihood of rate cuts.

Warsh announced that five task forces will be established to review key aspects of the Federal Reserve's policy making. He mentioned that these teams will look into things like how the central bank communicates, how it uses its balance sheet and what data it uses.

Warsh skips submitting 'dot plot' interest-rate path projection

Confirming that he did not submit a rate-path view for the so-called dot plot, Warsh cautioned against interpreting those projections too much and said he does not see it as “helpful in the conduct of policy”.The Fed's dot plot is a quarterly chart that indicates where top Fed officials see interest rates in the coming months. It provides a bird's eye view into whether policymakers plan to raise, lower or pause rates.

The June statement removed any guidance about future rate moves altogether. The new Fed chair noted that ⁠providing the forward guidance is not "well suited" given the current economic scenario.

However, he said: "I can't ​give you any forward guidance about what we're going to do next. The good news is we'll be meeting in six weeks."

Some experts pointed out that the shortened policy document marked the return to a format last used by former Fed Chairman Alan Greenspan. The FOMC's vote to switch to the new format was unanimous.

Most economists viewed Warsh's policy statement as hawkish with a stress on the inflation mandate, but not the employment mandate.

"This new era for the Fed is likely to see much less forward guidance, while it is also likely that the dot plot will be dispensed with as well, along with other major changes to Fed communication. Warsh’s laser-focus on inflation will come as a relief to the market, which was concerned about President Trump’s influence on him to lower rates," said Madhavi Arora, lead economist at Emkay Global Financial Services.

The path for rates ahead looks to be biased upwards, especially with price stability as the key guiding principle for the Fed from here on, she said.

What's in it for Dalal Street?

The economist believes the RBI’s focus is now set to shift to domestic dynamics.

"While a hawkish Fed could add to the RBI’s policy constraints ahead, the end of the Iran crisis (for now) and the RBI+GoI’s measures to stabilise INR and attract capital flows will mean that the RBI’s focus will now shift to domestic growth-inflation dynamics," said Arora.

She also said that the bar for a rate hike remains high, with the Indian central bank likely to continue with its wait-and-watch approach and only act when second-round effects of the energy shock start to emerge.

Wall Street Update: Dow falls 1% after 4% rise in four days

US equity benchmarks halted a four-day winning streak post-Fed announcements, with the Dow Jones Industrial Average (DJIA) closing 1.0 per cent lower. The blue-chip gauge had rallied 4.2 per cent in the past four sessions.

The S&P 500 closed 1.2 per cent lower while the technology stocks-heavy Nasdaq Composite fell 1.3 per cent.

Kevin Warsh is Donald Trump’s pick

The Fed's current chair, Warsh, is US President Donald Trump's pick for the top central bank position. Trump openly and frequently criticised Powell for his policy position.

In his last statement as Fed Chair, Powell congratulated Warsh and stated that the US central bank “exists for one fundamental purpose: to foster the economic conditions in which American families and businesses can thrive -- stable prices, a strong job market and a financial system they can depend on”.

Every decision by the Fed is made “in service of that purpose”, whether on interest rates or other issues, said Powell.

Powell’s latest term had begun in 2018.