Making a Statement

The FOMC statement, not the press conference, may be the best window into where the Fed is headed. Here's my mockup for Wednesday.

Wednesday is decision day at the Federal Reserve, the culmination of an intense two-day meeting and a debate that’s been running for six weeks since the June meeting. It boils down to one question: inflation is too high; what should the Fed do about it? It might be a straightforward question, but the answer is anything but. Coming to an agreement is what the “good family fight” at the Fed will be about this week.

Most of the coverage heading into this week’s meeting has focused on Fed Chair Kevin Warsh—whether it’s his low-information communication style or a need to establish his inflation-fighting credibility. The Chair matters, but the Fed is run by a committee, so it’s also critical to understand the committee’s thinking. The FOMC statement at 2 pm, which precedes Warsh’s press conference at 2:30 pm, may be our best window—short, but insightful—into where the Fed is headed. Today’s post offers my mockup of the statement. More important than the exact wording are the themes to watch for.

A new statement

The FOMC statement issued directly after every meeting since January 2000, and after every policy change since 1994, comes, as its name suggests, from the committee. The longstanding practice has been for the Fed staff to mock up three statements—the baseline, a more hawkish, and a more dovish statement—as part of the materials that go to the committee before the meeting. The final version reflects the decisions made at the meeting and any edits to the text that the committee can agree on. The exact details of the process have shifted some under Warsh. He said at the last press conference there was "one proposal on the table," not three, at the meeting. He also wants a short statement and no hints about the future direction of the federal funds rate. Even so, the broad contour of a consensus statement from the committee remains.

A short statement does not mean a weak statement. When Warsh headed an external review of communications at the Bank of England, he recommended the following:

The Bank should make public a concise summary of its policy decision and rationale as soon as is practicable upon the meeting's conclusion. This summary should encapsulate the MPC consensus. And the votes of individual Committee members should be stated in the policy summary. [Emphasis added in bold.]

That recommendation followed from how his review defined effective communication:

The effective communication of the immediate policy decision is important; so too is communication about the prospective contours of the economy and policy stance. A well-communicated policy is one which helps economic agents – households, businesses, financial markets – to understand the likely reaction function of policymakers to incoming information.

In keeping with the short-but-informative format that Warsh favors—and reflecting comments from Fed officials and the data since the June meeting—here is my mockup of the July FOMC statement:

It follows the basic structure of the June statement: 1) policy decision (fed funds rate and the balance sheet); 2) summary of economic activity and the labor market; 3) summary of inflation. It's slightly longer but still brief by Fed standards, and it leans toward rewriting rather than recycling words from the last statement. That said, some of the changes I am offering are substantive and reflect how I think the committee might want to move the statement. My mockup also reflects Warsh's own recommendations in the Bank of England review.

Changes in the statement.

The policy decision.

I expect the Fed to hold rates steady in July and not change its balance sheet policy:

The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent and ample reserves in the banking system, in support of the Federal Reserve’s dual mandate.

Market-implied odds of a rate hike are about 30% going into the meeting—unusually high this close to a decision, when the outcome is normally fully priced. Even so, it's more likely we'll see a few dissents in favor of a hike rather than a hike. As I told the Financial Times:

“They’re going to be talking seriously about the pros and cons of a rate hike,” said Claudia Sahm. “But looking at the commentary from various Fed officials, I just don’t see a majority in favour of raising rates already.”

Counting votes from public commentary is not a precise science, but it takes seven to make a majority, and only two have been making a strong case for hikes now. The decision paragraph in the statement satisfies Warsh’s criterion of a “concise summary of its policy decision.” But that’s only the first step.

Why did you do it and what would change policy?

The June statement said what the policy decision was and committed to deliver price stability, but it was missing that “rationale” or the “reaction function,” as Warsh had recommended to the Bank of England. If inflation is high, why hold rates constant? And what would it take to get a rate hike? Note that’s not asking for a prediction of future policy (forward guidance); it’s asking for a contingency plan. Since becoming Chair, Warsh has been unwilling to answer those questions at his public events. There are reasons to be cautious about unscripted remarks. So move it to the statement. It’s a committee agreement, not the Chair’s words. Of course, he would need to be willing to sign on to the text or register a dissent to it.

My inflation paragraph tries to convey the rationale and reaction function that I have heard from Fed officials and in the FOMC minutes of the June meeting. In a previous post, I discussed how the two scenarios in the minutes offered a reaction function for the Fed. But waiting three weeks for the minutes is too long a delay—it would be better to put a shortened version of it into the same-day statement:

Despite recent improvement, inflation is above the Committee’s 2 percent goal, in part reflecting supply shocks from the conflict in the Middle East and tariffs, as well as strong AI-related demand. If inflation remains elevated amid stable labor markets, some policy firming may be warranted soon to deliver price stability.

Why hold rates if inflation is too high? The strongest argument against a July hike is that the June inflation data were softer than expected, and the improvement was not limited to energy prices. Non-housing core services, which I previously flagged as a reason trend inflation is likely above 2%, were notably weak. Some outlier declines are unlikely to recur, but the latest read chipped away at the unusual strength from around the turn of the year. Holding now to gather more information about inflation is defensible, especially when so much of it is driven by supply shocks.

What would it take to raise rates? Inflation has been above 2% for more than five years, and the supply shocks from the Middle East and tariffs remain live wires, so holding the fed funds rate indefinitely raises questions. “What’s the plan?” is a reasonable question to ask the Fed, and it will come up at the press conference. Better a scripted, voted-on answer in the statement than Warsh dodging it with “we will meet again in seven weeks.”

Say the quiet parts out loud.

My mockup of the statement includes a callout to the maximum employment mandate in the economic activity and employment paragraph:

Economic activity continues to advance at a solid pace, driven by strong gains in business capital investment and resilient consumer spending. Job gains softened some recently, but the unemployment rate remains low. The labor market is broadly consistent with the maximum employment mandate.

The reason the Fed is emphasizing price stability now is that inflation is a problem for them, while employment is not. One could have misread the omission of maximum employment in the June statement as downgrading the importance of employment.

The June statement did not list the names of the committee members who voted. When it’s a unanimous decision, that’s fine. We can look up the committee on the webpage. However, if there are dissents this week, the statement should include their names:

The two dissenters, Beth Hammack and Lorie Logan, favored raising the federal funds rate at this meeting.

That’s consistent with Warsh’s recommendation to the Bank of England, too. Guessing games would be highly unproductive, particularly when the Chair is being guarded about his views.

In closing.

Pay close attention to the FOMC statement at 2 pm. The statement is where we get the decision and the vote count—that much is always true. For the past several years, the explanation came a half hour later, at the press conference. Warsh doesn't seem to use the presser that way, so with him as Chair, the statement might offer the clearest answer we get on the why and what's next of monetary policy. Many of the fights I remember from my time at the Fed were over who held the editing pen. I can only imagine the fight over the pen at this meeting. It's a good family fight, one determined to get policy and its communication right.