FOMC Recap: "Dark Matter" matters

 

• The FOMC maintained their policy fed funds rate at 5.25%-5.50%
• The statement noted that "there has been a lack of further progress toward" the 2% inflation objective.
• The FOMC will reduce the pace of QT.
• Powell characterized U.S. growth as strong, the labor market as relatively tight, and that it will take longer than thought for inflation to return to target.
• Powell continues to characterize monetary policy as 'restrictive' though noting that the data will ultimately tell them if that's true.
• Powell does not believe the Fed's next move will be a hike.
• Powell isn't really thinking about the calendar and whether they will have time to cut rate this year. "I don't know how long it will take".
• Powell said, the economy has been hard to forecast. There are paths to cuts and paths to no cuts, but he doesn't know.

"My own view is that physics envy drove economists to think of the social world as a potentially perfect machine." - Robert Skidelsky, What's Wrong With Economics?

It is sometimes said that economics suffers from "physics envy", aspiring to find the mathematical models that will afford us the precision of physical laws, seeking precision where none is often found.  Economist Robert Skidelsky points out the complexity of human behavior, the influence of social, behavioral, moral, psychological, and other factors that render making precise mathematical modeling of the economy impossible.  

These other factors are the "Dark Matter" of economics.  In physics, Dark Matter is something unobservable but inferred from the gravitational effect it has on physical matter.  It is the hypothesized thing that scientist believes effects the behavior of the galaxies.  In economics, I'll call Dark Matter all of the hidden, unobservable, or misunderstood forces that influence economic outcomes. This economic Dark Matter could be things like sentiment, changing attitudes and moralities, the role of money, financial conditions, the influence of the FOMC's own narratives and policies, the uncertainty of buildups of financial excesses, the global effects of monetary policy, feedback loops, the role of expectations, the credibility of the Federal Reserve and other institutions, and likely many other factors.  Some economist in the so-called school of "Market Monetarism" would place a strong emphasis on using market-based indicators to guide monetary policy, as these market based prices can provide valuable information about the stance of monetary policy.  In other words, by observing prices and nominal GDP, you can infer the existence of economic Dark Matter when policy doesn't generate the expected result.

We obsess over and analyze economic data, the FOMC meetings, the Fedspeak, but are we seeking precision where none is going to be found?  Are we failing to recognizing inherent uncertainties (even when they are telling us they are uncertain)? Are we succumbing to the noise, listening to the pundits, unable to find the signal?

Speaking of 'noise', the more beautiful sound is music. Speaking as a child of the 90's, Pearl Jam recently released their twelfth studio album, Dark Matter, and corresponding closely to today's FOMC meeting, will begin touring in support of this album on May 4th.  Inspired by the lyrics of the title track and with the help of ChatGPT, I wanted to share some thoughts on the Dark Matter of economics:

• "Steal the lights from our eyes": Represents the loss of clarity and transparency in economic decision-making, where hidden forces obscure understanding.
• "Take my blood from my heart": Symbolizes the extraction of wealth or value from the core of the economy, leaving it weakened.
• "We're in all of this dark matter": Reflects the pervasive influence of hidden economic factors, such as market sentiment or systemic risks.
• "Take the breaths from my chest, Take the pulse and I'm outta line": Suggests the suffocation of economic vitality and stability, leading to disruptions and imbalance.
• "Denounce the demagogues, King diamond to discard": Calls for rejecting misguided leadership and outdated economic models that no longer serve the collective good.
• "Deplore the dialogue, Your word against the law": Highlights the breakdown of effective communication and trust in economic institutions, leading to uncertainty and conflict.
• "It's strange these days, When everybody else pays For someone else's mistake": Illustrates the unfair burden placed on the broader population for the failures or misdeeds of a few, echoing themes of moral hazard and systemic risk.
• "No tolerance for intolerance, intolerance for- No patience left for impatience no more": Reflects the need for a balanced and disciplined approach to economic policy, rejecting short-termism and reckless behavior.
• "No love lost for lost loves, No sorrow for the unaccountable": Conveys the necessity of holding accountable those responsible for economic harm, without sentimentality or excuse.

Overall, these allegorical references paint a picture of the complex and often opaque world of economics, where hidden forces and systemic flaws can have profound impacts on individuals and societies.

There might be more wisdom in this AI generated allegory than in obsessing over every word Powell spoke today.