A New Fed Chair Is Changing the Conversation    
with Adam Phillips, Managing Director, Investments 

Investors received their first real look at how new Federal Reserve Chair Kevin Warsh intends to lead monetary policy, and the message was clear: expect fewer words and greater emphasis on inflation.

For years, markets have grown accustomed to extensive guidance from the Federal Reserve. Under Ben Bernanke, Janet Yellen, and Jerome Powell, the Fed increasingly embraced transparency, providing detailed commentary and signaling its thinking well in advance. That approach became known as forward guidance and often helped markets anticipate future policy moves.

Warsh appears to be taking a different path.

The Federal Reserve's latest policy statement was notably shorter than those issued in recent years, providing only essential information rather than extensive commentary. The change reflects Warsh's long-standing criticism that central banks can overcommunicate, creating expectations that may become difficult to meet when economic conditions change.

The shift was also evident in the Fed's quarterly Summary of Economic Projections, which includes the closely watched "dot plot" showing policymakers' expectations for future interest rates. While eighteen Fed officials submitted projections, Warsh notably chose not to provide one himself.

More important than the missing dot was what the remaining projections revealed.

A growing number of policymakers now believe interest rates may need to move higher before year-end. Just months ago, many investors expected rate cuts to be the next policy move. The latest projections suggest that view has changed considerably.

The primary reason is inflation.

Federal Reserve officials now expect inflation to end the year at 3.6%, up from a previous estimate of 2.7%. While easing tensions in the Middle East and lower energy prices have helped reduce some inflationary pressures, policymakers remain concerned that inflation is proving more persistent than anticipated.

Warsh has consistently argued that controlling inflation must remain a priority, particularly after inflation has remained above the Fed's 2% target for more than five years. The latest projections suggest many policymakers share that concern.

Inflation pressures are also coming from sources beyond energy markets. The rapid expansion of artificial intelligence infrastructure continues to drive demand for advanced technology components, increasing costs throughout the supply chain. Recent comments from Apple CEO Tim Cook regarding higher product prices highlight how these pressures are beginning to reach consumers.

For investors, the key takeaway is not simply that inflation remains elevated. It is that the Federal Reserve appears willing to maintain a more cautious, inflation-focused stance than markets had expected.

As a result, investors may need to adjust to a Federal Reserve that speaks less frequently but places greater emphasis on keeping inflation under control. In the months ahead, each statement and public comment from policymakers could carry even more significance than before.

While this week's economic calendar is relatively quiet compared to recent weeks, upcoming inflation data and developments in the Middle East will remain important areas to watch. For now, markets appear focused on a central question: how long will inflation remain stubbornly above target, and what will the Federal Reserve do about it?

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

Hello, and welcome to this week's market update. I was saddened to wake up to the news that former Fed Chair Alan Greenspan passed away. Greenspan oversaw the second-largest expansion of our economy during his tenure, and also became famous for what would ultimately be known as Fed speak or what some might call strategic ambiguity.

In fact, he once said, "If I seem unduly clear to you, it's probably because you misunderstood what I said." I think that's... It, it, it's a-- He had a lot of these great one-liners. Unfortunately, I can't recall all of them from my memory. But what's interesting is that it was, it was very different from the type of communication style that we've grown accustomed to over the last twenty years or so.

His predecessors included Ben Bernanke, followed by Janet Yellen, and then Jerome Powell, and each of them focused on better and improved communication, what became known as forward guidance. They were really focused on making sure that investors, the market, the public knew what they were thinking and what the plans were for the future of monetary policy.

And that's what makes this, the, the timing of this so interesting. So last week, as I mentioned in our most recent market update, last week was a really interesting week because it was not only the F- the FOMC meeting, but it was the first Federal Reserve meeting that was going to be hosted by the new Fed chair, Kevin Warsh.

And he has been a, a very vocal critic of forward guidance, and he's been talking about how the Fed over-communicates, and really they should only talk to the public when there's something to share. He wants to be very, very careful about not putting the policymakers into a corner and, and showing what their plans are when data changes all the time.

So all eyes were on Kevin Warsh coming out of last week's meeting, and we’re really anxious to hear what he had to say. So let's dig into that a little bit. I'll just start with the, the policy statement that always accompanies these meetings. We, we get the policy statement. I- In the past, it's averaged over three hundred words.

I think the, the one before this, so the last meeting that was chaired by former Fed Chair Jerome Powell, it was just over three hundred and forty words. This one was trimmed down to a hundred and thirty words. So that tells you right there: much shorter statement, really just giving the public what they, what they need to know and nothing more.

This also was the quarterly meeting where the Fed provides us with a new summary of economic projections, what we call the SEP. That includes the dot plot. And so let's just look at that dot plot. The dot plot is normally nineteen members, and they anonymously provide their expectation for where policy rates should be at the end of the next few years.

And what was interesting about this one is that the dot plot for the end of twenty-twenty-six, showing where policy rates should be at the end of the year, it only included eighteen dots. Kevin Warsh did not provide his opinion. I think in a way, maybe protesting- I don't know if that's too strong a word, but, but saying that really these dots aren't that useful and saying, "I don't need to provide one.

You all can if you want." So there were only 18 dots this time, and what was really interesting here is that nine of those dots actually said that implied that a rate hike would be necessary between now and the end of the year. Six of those nine actually said that multiple rate hikes would be necessary between now and the end of the year.

So what this tells us is that there has been a clear shift over the last several months from expecting the next policy move to be lower interest rates to one where the market and policymakers are generally expecting the next rate hike or rate move to be higher. So that's really interesting. And if you look at the rest of the Summary of Economic Projections, the data that we get, which includes where policymakers expect inflation, the unemployment rate, and growth to be over the next couple of years.

I think if we focus on inflation, I think that really tells you why the attitude has shifted towards a more hawkish stance, meaning more mindful of inflation. Within the Summary of Economic Projections, we see that the inflation expectations have increased from two point seven percent the last time this was done a few months ago to three point six percent at the end of this year.

So this tells us that even though we've seen in recent days and weeks some progress and things moving in the right direction when it comes to our negotiations with Iran, we've seen that lead to lower energy prices over the last few days, it tells you that even with that progress, policymakers still think that inflation is something to keep an eye on.

And it's not going to cause them to remove this more hawkish bias anytime soon. Kevin Warsh is known as a hawk, meaning he's very, very mindful of inflation, and he has said that he thinks that inflation is something that monetary policy can control and influence. And the, and the fact that inflation has been above their two percent target for over five years now means that they really need to make sure they get it right.

And so this explains why they are leaning this way, why the markets are responding the way that they have, and they're going to be hanging on every word that the, the Fed and the new Fed chair is going to provide here because the expectation is that those words will become fewer and fewer.

And so they really want to see what they can get out of the Fed. I will just highlight that while we're talking about inflation, the other thing that's really interesting is that what we've seen in, in recent data is that inflation is not only being driven by higher energy prices, but it's also being driven by the, the growth and the expansion and, and expenditures around this artificial intelligence build-out.

One thing I did notice last week was that Apple's CEO Tim Cook came out and said that they're going to raise prices on a number of their products, and that's because input costs for them have really skyrocketed. The price of chips has skyrocketed because demand is so high. So it's going to take more than progress in the Middle East to bring overall inflationary pressures down.

So these are some of the things that I'm keeping an eye on. We could really leave it there, I think, for right now, we covered a fair amount. I will just say this week compared to last week, where we had the Fed meeting that all eyes were on that, and then the week before that, we saw the SpaceX IPO really get a lot of our attention.

This week, by comparison, seems relatively boring. It's not. There are going to be some interesting things. We'll get some new inflation data that'll probably reinforce the hawkish positioning by the Fed. Um, but aside from that, you know, we'll be watching for developments out of the Middle East as negotiations continue.

But we can leave it there. I'll look forward to catching up with you next week. As always, if you have any questions, please don't hesitate to reach out to your advisor. much.