Presuming Kevin Warsh’s nomination as Fed Chair is approved by the Senate, as is widely expected, yesterday’s FOMC meeting was Jerome Powell’s last as its Chair. However, he will stay on as a voting Governor. As he explains: Things that happened in the last 3 months left me no choice but to see them through at least that long.” His personal forecasts and opinions on future monetary policy were less important than they were at prior meetings. But the , which represents the views of the voting members, was very telling.
As seen at the end of the statement, in the graphic below, there were four dissenting votes, the most since 1992. Stephen Miran voted to cut rates by 0.25%, as he has in the last few meetings. More interestingly, three voters, Beth Hammack, Neel Kashkari, and Lori Logan, agreed with no change to the but dissented on the vote because they did not support what they viewed as an easing bias in the statement. They took offense at the following sentence:
The Committee is attentive to the risks to both sides of its dual mandate.
Given that three dissenters have recently voiced inflationary concerns, their dissents represent a new hawkish bias toward potentially raising rates. With Powell lingering at the Fed and the three hawkish dissents, Warsh will have trouble forming a consensus to cut rates.
To wit, the Fed Funds futures markets now price in a 88% chance the Fed doesn’t change rates by the end of January 2027 and a slight 12% chance of a rate hike. Given the widely differing opinions of FOMC voting members, Fed meetings are likely to become less predictable, which may lead to more volatility in the stock and bond markets. That said, a resolution of the Iranian conflict and lower could bring a consensus back to the Fed.
Revisiting Hedges
The end date on the graph below is early April. We look back in time to show what the market looked like when we added hedges to our core portfolios. Going into the hedging decision, the S&P 500 had traded below its 200-day moving average for almost two weeks.
Further, prior to adding the hedges, it had rallied back to the 200-day moving average. As the graph highlights, amid tariff concerns in April 2025, the market behaved similarly, with the price rejecting the 200-day moving average and falling sharply. Our concern was a similar rejection of the key moving average, followed by a replay of that event.
Furthermore, amid the ongoing conflict in Iran, there were geopolitical concerns and oil-related economic risks to consider. A cease-fire was agreed upon days later, and the market zoomed to record highs. We removed the hedges right after the agreement was announced, when the S&P 500 was trading decently above its 200-day moving average.
Looking back at the hedge trades can be instructive.
- The hedges were relatively small, thus not nearly enough to shield our portfolios from losses or inhibit gains. We certainly had lots of room to sell or add more hedges if needed.
- Our concern was broad-based selling, or systematic risk, not losses due to the idiosyncratic, or company-specific risk of any of our holdings. Thus, the hedges allowed us to reduce risk on the margin and keep our portfolio intact.
- The hedges were not put on in anticipation of a full-blown bear market, but were intended to shield our portfolios from geopolitical volatility.
- We are better off that the hedges didn’t work. Yes, we took a slight loss on the hedges, but our portfolios fully participated in the upside over the last few weeks.
Tweet of the Day
