We know the Fed cut 50bps and are "forecasting" another 50bps of cuts this year and another 100 next year. We also know there was a Governor dissent for the first time since 2005. Powell stressed greater confidence in inflation reaching target, no one asked if the Fed's FAIT (flexible average inflation targetting) should be symmetrical, and that Powell believes labor markets are no longer a source of inflation. The median dots show a Fed that sees unemployment rising in the face if falling rates even as inflation slowly returns to target. Powell said something about the possibility of the neutral rate being higher. I don't recall much discussion about fiscal policy and overall the Fed will make decisions on the basis of the evolution of the economy.
I didn't write a FOMC Recap for this one. If I had written a recap, I might have focused on a Howard Marks concept I wrote about earlier in the week that he calls "the perversity of risk". Conceptually it is the paradox that risk is highest when market participants perceive it to be the lowest. Under that paradox there are two initial questions I think are worth considering following the FOMC meeting today: (1) is the Fed too confident about the risk surrounding inflation? and (2) are investors too confident about macroeconomic risk in general as they bid stocks and bonds both to recent highs? In regards to the second question are investors actually too complacent in the risk related to employment. With regards to both of these questions, I have no answers, only more questions.
If I were to have written a recap, I'd probably stick with some themes from Marks writings and try to think about how they apply to monetary policy and the current stance of the Fed's policy. Marks says "Not trying to maximize is an important component in preparing for what life throws at you...". I might try to discern if the 50bp cut is an attempt not to maximize the fight against inflation, or whether it's actually a 'mistake' in the Fed trying to maximize employment. I might try to think about whether a 50bp cut leads to a less fragile economic outlook, one that will be more resilient to shocks, or whether it creates vulnerabilities to positive shocks that spur reignite inflation.
Ultimately if I were to write an FOMC recap, I might borrow thinking from William Green's book "Richer, Wiser, Happier" and his chapter about Marks titled "Everything Changes". I might talk about Marks thinking around impermenance. About how we can't predict the future, not only do we don't know what will happen, often we don't even know what could happen. About how we shouldn't cling to things that we know can't last. About thinking in terms of preparation rather than prediction. About discipline rather than biases and emotion. About how we shouldn't waste our time trying to predict interest rates, inflation, growth, or other things that are influenced by so many factors with randomness. About how investor psychology historically creates cycles. About looking at things in terms of "Where's the mstake?" And about "bearing risk intelligently while never forgetting about the possibility of an unpleasant outcome."
I think I'd write something about that and conclude it with a statement simply saying "I don't know."
If you were to have written a FOMC recap what would you write?
Twitter/X Thoughts of the Day will return tomorrow.
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