Sean Williams, The Motley Fool
4 min read
Last week was a tone-setter for Wall Street. It marked the busiest week of the third quarter for earnings releases and featured a Federal Reserve interest rate decision.
But on July 29, the day Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) announced that they were leaving interest rates steady, the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) tumbled. In fact, it was the Dow’s worst single-session performance in more than a year.
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Moreover, it was a history-making FOMC meeting in more ways than one. Wall Street and investors witnessed something that hasn’t happened in 56 years at America’s foremost financial institution, which has significant implications for the stock market.
A Fed divided against itself cannot stand
No one ever said that overseeing U.S. monetary policy would be easy. However, President Donald Trump’s handpicked successor to Jerome Powell took the reins at perhaps the most inopportune time.
To begin with, the combination of Trump’s tariffs modestly lifting prices in the goods sector and the Trump-led Iran war pushing up fuel prices at the fastest pace in three decades sent trailing 12-month inflation to a three-year high of 4.2% in May (the month Warsh was sworn in).
The other glaring issue for the new head of the central bank is that he took over a historically divided FOMC. While Powell’s tenure was marked by the lowest per-meeting dissension rate dating back to 1978, his final FOMC meeting as Fed chair in April was tarnished by four dissents (one member favored a quarter-point rate cut, while three others opposed the inclusion of the easing bias statement).
Although Warsh’s first meeting as Fed chair in June featured no dissents, this wasn’t the case on July 29. Beth Hammack, Neel Kashkari, and Lorie Logan all dissented in favor of a quarter-point rate hike. Not only was this the first time we’ve seen three dissents in the same policy direction since September 2016, but it’s the first time a new Fed chair has overseen three dissents this early in their tenure since 1970!
A lack of monetary policy cohesion at the central bank is potentially dangerous for Wall Street. The Fed is commonly viewed as a foundational pillar to Wall Street’s long-term success. The longer this historic division continues, the more likely it is that the central bank will lose the credibility it’s taken a long time to earn.
