FOMC Recap: 6 7

 Maybe Edward, maybe not…if you know, you know

Six… Seven

The Fed held.

4.25%–4.50%.

No surprise there.

But two Governors dissented — the first time that’s happened since Jurassic Park debuted and Alanis dropped Jagged Little Pill. The headline writers scrambled. “Cracks in the façade,” they muttered. “Rising internal tension.” Okay.

Dot plot? Still penciling in one rate cut by the end of 2025?

The market responded with a casual scroll, maybe a sip of flat LaCroix. We’ve heard this song before — and we’re not dancing to it anymore.

Truth is, the Fed walked out like Powell always does:

🎶 Six… Seven… 🎶

Suit pressed, message tight, performance predictable.

But in the background, markets were already vibing to their own beat.

🎺 Doot doot doot da-doot doot…

Rate cuts aren’t coming because the Fed said so.

They’re coming because credit’s flowing, nominal’s cooling, and politics are heating up.

This isn’t a pivot. It’s a vibe shift.

And Powell’s still reading off the prompter while the music’s already changed.

– EQ

Edward Quince’s Wisdom Bites: Timeless Lessons For The Powell Rangers (and all of us)

Another FOMC day, another deluge of data, and another chorus of “experts” telling us exactly what the Fed did wrong, or right, or what they should do next. You know, the usual. While this blog famously believes that most of the daily financial commentary is “noise and false stimuli”, occasionally, amidst the cacophony, you stumble upon timeless wisdom. And who needs timeless wisdom more than the Federal Reserve, constantly navigating unexpected twists and turns? So, dear reader, grab your favorite beverage (mine’s a newly-tariffed tequila, if this blog’s GoFundMe ever takes off), and let's distill some enduring lessons for the FOMC, drawn from the wellspring of this very blog.

Here are 10 enduring and wise quotes that can serve as valuable advice to the Federal Reserve over time:

1. Independence is Paramount. Peter Stella nailed it: “I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.”. When politicians are clamoring for this or that, the Fed's ability to act without political interference is the bedrock of its credibility. Don't be swayed by the siren song of fiscal convenience.

2. Credibility Restores Stability. As Paul Volcker’s memoir reminds us, credibility is crucial "in restoring price stability and guarding against the ‘real danger [that] comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking…'". It’s about building trust, which, like good wine, takes time.

3. Say Less, Imply More. Robert Greene’s Law 4: “Always Say Less Than Necessary: When you speak, always say as little as possible. The more you speak, the more likely you are to say something foolish.”. In a world of constant Fedspeak and interpretations, perhaps fewer words mean more impact. As the "wise old owl" knows, "The more he saw the less he spoke, The less he spoke, the more he heard".

4. Guard Your Reputation. Greene’s Law 5: “So Much Depends on Reputation – Guard It With your Life: Reputation is the cornerstone of power. You can influence more people and gain more opportunities with a solid reputation. Therefore, it is essential to protect it fiercely.”. The Fed’s power isn't just in its balance sheet, but in the trust it commands.

5. Actions Speak Louder. Greene’s Law 9: “Win through your Actions, Never through Argument: Actions demonstrate competence and create value, whereas words, often in arguments, lead to negative emotions and resentment.”. The market, and the economy, ultimately respond to policy actions, not carefully crafted press conference narratives or veiled threats about future moves.

6. Prevent Crises, Don't Just Cure Them. Charlie Munger's wisdom applies universally: “Nobody survives open heart surgery better than the guy who didn't need the procedure in the first place.”. This is a potent reminder for the Fed to act prudently and prevent economic conditions from deteriorating to a point where drastic, "surgical" interventions become unavoidable.

7. Plan for the Unexpected, Not the Predicted. As Dwight D. Eisenhower sagely put it: “Plans are worthless, but planning is everything…” because an emergency “is unexpected, therefore it is not going to happen the way you are planning.”. The future is inherently uncertain. Flexibility, not rigid forecasts, is the superpower.

8. Embrace Humility, Not Perfection. “It is impossible to be perfect: … The odds that the Fed can steer the economy to perfection by moving an interest rate both gives the Fed too much credit and creates an illusion that something as complex as the economy is that controllable.”. The economy is a beast, not a tightly controlled machine. Intellectual humility is a virtue.

9. Trust Observable Data, Not Blurry Guideposts. As one XTOD advises on r-star, it’s "advisable to guide policy decisions based more firmly on observed inflation rather than on highly uncertain estimates of the natural rate.”. When models and theories get too "blurry", perhaps it’s time to focus on what you can actually see and measure. Less star-gazing, more data-gazing.

10. Expect the Unexpected. This blog’s core philosophy: “The primary lesson is one of learning that the future is uncertain, expect the unexpected and that anything can happen.”. No amount of forecasting, political pressure, or market "vibes" can change the fundamental truth that the economic road is unmapped. Remain adaptive.

So, there you have it, folks. Ten timeless lessons that apply to the Fed, and frankly, to us all. In a world drowning in data, forecasts, and fleeting narratives, the real wisdom lies in subtraction, in discipline over drama, and in the humble acknowledgment that “Nobody knows anything, and that's okay.”. Because ultimately, “Your behavior matters more than your forecast.

Daily Economic Update: May 8, 2025

A Great Deal Of Uncertainty - So Much Uncertainty

We all knew the Fed was going to hold at 4.25% - 4.50%. I skipped the recap out of respect—for your time and your intelligence.

So what, if anything did we learn.  In my opinion, not much. Here were my takeaways:

• There’s no rush to cut rates from their “modestly restrictive” level.

• Risks have risen to both sides of the Fed’s dual mandate and the reality is no one knows whether high unemployment or high inflation will be the more pressing problem.

• Patient Powell: “We’re in a good place to wait and see” “The cost to waiting is low” “Appropriate to be patient”

• “My gut tells me uncertainty about the path of the economy is elevated…the right thing for us to do is await further clarity.

My other major takeaway was that at least 80% of reporters seemed to be begging for rate cuts. I’d have to review the transcript, which I don’t care enough to do, but in real-time, the sentiment of most of the questions seemed to be pressing Powell for an explanation as to why “preemptive” rate cuts shouldn’t occur at present.

Below Is More Value Than Yesterday’s FOMC - You’re Welcome

“In making decisions under conditions of uncertainty, the consequences must dominate the probabilities" - Peter Bernstein.  There, that quote was more valuable than the press conference.  Most of this blog is simply writing about uncertainty. Author Robert Greene once wrote, "The need for certainty is the greatest disease the mind faces."  

And The Source Of Uncertainty - Tariffs (for now)

In response to a reporter's question about exempting certain baby products from Chinese tariffs, Trump indicated that he’s not open to removing the 145% tariffs on China as a means to getting the Chinese to the negotiating table.

We’ll see how the reported talks between Bessent and the Chinese go in Switzerland and in the meantime CNBC have their cameras watching to see if ships are coming into the Port of Long Beach.

But At Least AI Didn’t Destroy the World Today

Unless you were Google that is…Alphabet shares were down 8% as Apple exec said that search is toast as AI answers will replace those blue hyperlinks we’ve all become accustomed to seeing.

Overall the S&P finished slightly higher at 5,631. The 2Y and 10Y yield were little changed with the 2Y at 3.79% and the 10Y at 4.28%.

We’ll see if the BoE can be more exciting than the Fed.  

Utter Boredom
Until then you can reflect on this quote from Dune:  “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”

XTOD’s:

XTOD: Gem after gem.   1/ Mediocrity is invisible until passion shows up and exposes it.

2/ Time is the best filter. It is the only filter I trust. 3/ Victory is spelled survival.

4/ The hard way is the right way. 5/ What you want is money, but what you really want is meaning.

XTOD: China Slashes Rates and Reserve Ratios: Liquidity Lifeline or Desperation Signal?

China just fired a monetary bazooka. On May 7, 2025, the People’s Bank of China (PBOC) announced a 50 basis point cut to the Reserve Requirement Ratio (RRR) and a 10 basis point cut to key lending rates, unleashing an estimated ¥1 trillion (~$138 billion) of liquidity into the system. This is Beijing’s most aggressive monetary easing since the early COVID era. But don’t mistake this for routine stimulus. This is a signal and it’s flashing red…..Bottom Line:

Don’t let the mild rate cut fool you this is a liquidity distress signal from the world’s second-largest economy. Markets will celebrate short-term stimulus. But underneath, Beijing is bracing for impact

XTOD: The world doesn’t run to growth when things go wrong. It runs to shadows.  Today, two of those shadows — Switzerland and Hong Kong — are screaming.  The Swiss franc, too strong again. A currency not rising on strength, but on fear.  Prices in Switzerland? Flatlining. Demand, evaporating.  The SNB is watching inflation disappear — and with it, its reason to hold.  Zero is coming. Maybe negative. Again.  Half a world away, the Hong Kong dollar slammed into its upper bound.  The HKMA stepped in. First time since 2022. Not because the city’s thriving — but because the capital is clawing its way to safety.   Out of Asia. Out of credit. Out of risk.  These aren’t technicalities. They’re tremors. Tiny economies. Heavyweight currencies. Both surging not on confidence — but on risk aversion.  This is what stress looks like in a world of financial scaffolding.  When the safe havens get crowded, the system is telling you something.  The pipes are creaking. The air is thinning. Risk is rising. Rates are falling. 

Soft landing?  No. This is what remembering how to do worse looks like.

https://x.com/domcooke/status/1919728149396336990

https://x.com/onechancefreedm/status/1919937328295882838

https://x.com/JeffSnider_EDU/status/1919986155790942271

FOMC Recap: March Madness Fed Edition Redux

March Madness, Fed Edition: Same Playbook, New-ish Opponents

Another March FOMC meeting. Another round of Powell & Co. holding rates steady at 4.25% to 4.50%. And another tip-off to March Madness likely stealing the headlines by tomorrow morning.

Sound familiar? It should. The Fed is sticking to its game plan—slow the runoff of Treasury holdings starting in April, stay patient, and hope the economy keeps playing along. But, as every coach knows, no matter how good the scouting report looks, the game rarely goes according to plan.

Last year, I asked what lessons the Fed could take from March Madness—impossible perfection, the need for constant adjustments, and the reality that the future is always uncertain. If you missed it, you can catch that post here. Spoiler alert: those lessons still hold.

Today, the Fed’s projections show slower growth, stickier inflation, and a higher-for-longer rate outlook. Call it a defensive adjustment against inflation, that “streaky shooter” Powell warned about. Meanwhile, tariffs are back on the floor, pressing inflation higher and crowding growth into the corner.

But as in the tournament, surprises happen. Powell admitted “unusually elevated” uncertainty. Translation? The Fed’s ready to call timeout and change defenses if needed.

Plans are worthless, but planning is everything. The Fed’s bracket isn’t perfect. Neither is yours. Survive. Adjust. Advance.

FOMC Recap: Like Super Bowl Media Day, But For Interest Rates - And Just as Meaningless on the Outcome of the Game

For all of the AI breakthroughs the models still can't spell. 

This FOMC Meeting feels like the somewhat boring two-week period leading up to the Super Bowl.  We know the two teams and we're just waiting to see them play. In the meantime, we just get lots of talk and "media days", like today.

The two teams in this year's upcoming "Economic Super Bowl" are team money-printer (i.e. monetary policy) and team tariff (or more broadly, fiscal policy).  Perhaps these are the wrong monikers for the two teams, but I think the idea “r-star” vs. “fiscal r-star” has some merit in my opinion.  After all, Powell has characterized the current path of fiscal policy as “unsustainable” and a “threat to the economy” over time.

If you’re unfamiliar with the concept of “fiscal r-star”, an idea coined by Marijn Bolhuis at the IMF, I encourage you to read my post here.  

As for the meeting, here were the “important” points:

• The Fed held their policy rate at 4.25% - 4.50%.
  
• Vote unanimous. Labor market ‘solid.’ Inflation still ‘somewhat elevated.’ Oh, and they cut the line about inflation progress—but Powell insists it’s just ‘language cleanup,’ not a shift in tone.

It really feels like a less entertaining “media day” leading up to the big game.  Lots of talk, little action. At least on Super Bowl media day you get some interesting questions and funny exchanges.  At the next Fed Listens event, I will offer up that Stephen A. Smith and Christopher “Mad Dog” Russo be required participants at every FOMC press conference going forward.  Can you imagine Stephen A. starting his line of questioning with something like “Mr. Powell, you got some explaining to do!” or Russo responding to Powell with something like “Why won’t you answer the question?!”  Relatedly, is the Fed really not taking any responsibility for the increase in “term premium”?  Apparently not.

In addition to the many questions around Trump related policies that you knew Powell wasn’t going to touch with a ten-foot pole, Powell did get a few questions where I thought we might have a shot at getting a real answer.  For example, he got asked about the recent AI sell-off, whether he had any concerns about “bubbles”, a question about “uncertainty” and one about crypto.  Unfortunately, like other questions, even these are the types of questions you know the players media handlers have already trained the player to provide a non-answer. 

At some level, I would have rather seen someone ask Powell what he ate for lunch today, to name his favorite Ninja Turtle, or asked “If you were a tree, what kind of tree would you be?” or just ask him who he thinks might win the Super Bowl. Answers to any of these questions might have allowed us to form a better opinion on the economic outlook than the questions asked today which all got “non-answers.”

At least leading up to the Super Bowl we get to watch game highlights in addition to hearing all the punditry. Maybe the FOMC Press Conferences should have more visual effects?  I’d like to see Powell up there dissecting the economic data and forecasts the way an NFL analyst breaks down game film. I’ll offer that up as feedback at the next Fed Listens event as well.

As is the case with punditry and speculation in general, none of it directly impacts the outcome of the game.  It’s questionable whether any of the punditry and talk carries any information at all or if it’s just noise. 

The Super Bowl gives everyone an opportunity to place their bets on just about anything related to the game, our financial markets offer the same.  Market participants place their collective bets about the future of the economy, including any of a myriad of prop bets. Like fans of the Eagles and the Chiefs can bet on their team, in markets we have those who may see a continued “soft landing” as the favorite while others may feel strongly that “higher for longer” will prevail and can bet directly on interest rates.  If you want to make a prop bet, the Super Bowl offers an incredible variety, are our financial markets all that different, have you seen memecoins and triple leveraged etfs?

Like the lead up to the Super Bowl, there are too many “what if” scenarios to parse.  In the case of the Super Bowl, the outcome might be very different if a player like Barkley or Mahomes were to get injured.  In the case of the economy there are a ton of “what if” scenarios related to tariffs, tax policy, immigration and other fiscal topics that are likely to have an impact on the outcome for economic growth, inflation and employment.  Powell cited a panoply of things that could ultimately decide the outcome of his game.

My advice to Powell remains largely unchanged since my January 2024 post which you can and should read here.  At this point, Powell’s game plan seems set—he’s running out the clock until something forces him to call an audible. Will it be tariffs? Taxes? A surprise market fumble? Just like the Super Bowl, we’ll only know when the real action starts.

FOMC Recap: This Is FedCenter

 

This is clearly an AI generated parody image, so just roll with it.

Hi there and welcome to a very special edition of FedCenter. We're thankful that you've joined us. Today is a special year-end review edition. We’ll be counting down the Top Ten Plays from this year’s FOMC Recaps, but before we get there, let’s dive into this afternoon’s game of the week which featured the Powell Rangers vs. the Market Memers.

 

This isn’t the first time these teams have met and on the season series it’s been all Market Memers.  The Memers have been on a tear of late, though they entered this game without star phenom HAWK (Tuah) coin, who has been suspended for the remainder of the season.  The loss of Hawk Tuah hasn’t had much impact on the Memers of late as FartCoin has been stellar off the bench.  Let’s face it the Memers team is loaded with a cast of all-stars like PNUT, Roaring Kitty (who has been killing it since his return from injured reserve), and Moo Deng among others.   

The Powell Rangers entered this matchup riding a losing streak dating back to September 18, 2024.  The Powell Rangers star, Jay Powell (aka J-Pow), has certainly doing his best to imitate Heisman winner Travis Hunter of late, believing he can play both offense and defense, but let’s face it his stats this year seem to indicate he’s been letting a few inflation players get right past him. 

Speaking of September 18th, the Powell Rangers haven’t shown up on defense since Miki Bowman, who her teammates describe as the “heart of this defense (against inflation)”  was solid in net, with a late game glove save to prevent a power play goal as time expired, with her decision to dissent.

Heading into the game Powell Rangers assistant coach NikiLeaks mentioned how the team was searching for identity, struggling with the loss of one of their start players “R-Star”.  

Vegas knew going into this matchup that Powell was going to have a tough facing his arch nemesis and one of the stars of the Memers, “Money Printer go brrrrr…”    

So let’s get to the highlights.

Out of the gates, The Powell Rangers took a shot and cut rates 25bps to 4.25% - 4.50%.  In drawing up their play the Powell Rangers cited “economic activity has expanded at a solid pace”  while acknowledging that labor market conditions have “generally eased” while inflation remains “somewhat elevated”.  Overall characterizing risks as more balanced.

It was typical Powell Rangers strategy of trying to skate where the puck is going to be while watching their flank.  This time Cleveland Fed President Beth Hammock stayed back on defense, dissenting.  After all it is the Cleveland Fed that is the Fed’s center for inflation research and that pesky player for the Memers, the Money Printer, is always ready to run right past Powell. 

The game progressed with the Powell Rangers being pretty stingy on defense in the second period, lowering the number of projected cuts to the 2025 Fed Funds rate by 50bps, pricing out 2 cuts relative to their last projections due to higher inflation projections, and slightly adjusting their longer-run Fed Funds neutral rate up to 3%.

At the second intermission it looked like the Powell Rangers had Market Memers on the ropes, with yields rising while equities and crypto were falling.

Entering the third period (the press conference), oddsmakers were wondering if the Powell Rangers would allow the Market Memers a comeback as the Memers would look for openings where the Powell Rangers might be making the same mistakes of the 1970s and be sticking to their notoriously inaccurate forecast?

The third period opened with the Memers taking a shot, looking for an opening in the Powell Rangers defense, with the typical attack focused on "Why did you cut today, if you expect inflation to remain above target next year?"   The Powell Rangers defense lead by J-Pow, was their usual skating around in a manner that utterly confuses the opponent while producing no tangible results.

The Powell Rangers coach played under a 5 prong attack which consisted of "growth is stronger, unemployment is lower, inflation is higher, we’re closer to neutral and uncertainty is higher” as a strategy to keep the Memers at bay.

Powell's defense even added a trick-play which he called in as "driving on a foggy night" as a way to keep the Memers off his tracks as he skated up the ice.

At one point during the third period, Rangers star J-Pow seemed to lose track of the play call, failing to find the data during a question and shuffling papers repeatedly.  Powell almost lost the puck on a few occasions, but the Memers failed to capitalize on the Rangers few openings and couldn't find much of a "dovish" opening that would have allowed them to put some goals on the board.

In the closing moments of the third period, the Memers had an opening, trying to run their "financial conditions" play, seeing if they could get the Rangers to give them an opening with a good old "Bitcoin" question, but the Rangers defense dumped the puck back down the other end of the rink.

The Powell Rangers seemed to be "in a new phase" in terms of their play calling relative to their last few games and it seemed to keep the Memers off guard.   J-Pow's late game defense even consisted of a Jedi mind trick where he said something like "there is no certainty.  It's actually a good thing that we know that we don't know exactly [where the neutral rate is]." as a way to combat the opposition, who promptly turned the puck over.

While skating off the ice with the upset in the books, J-Pow, said "the jobs not done" and we'll get inflation back sustainably to 2%.

We'll get interviews with all the Powell Rangers stars over the coming weeks.

Now turning our attention to the FedCenter Top 10 Highlights of Fed Watching in 2024 (courtesy of AI's reading of my FOMC recaps):

Number 10: The Man in the Orange Hat - Election Year Politics! Remember way back in January when the Fed was still hiking rates? Talk about a flashback! Turns out, our guy J-Pow is a Deadhead, and we're pretty sure he wasn't listening to "Sugar Magnolia" when he was staring down those inflation numbers. This was the year the author started worrying about those election year shenanigans, and he even channeled some Paul Volcker wisdom to remind us that politics and monetary policy don't always mix!

Number 9: March Madness Lessons: The Fed's Bracket is Busted! Springtime! Birds are singing, flowers are blooming, and the Fed is trying to figure out how to pull off a soft landing. Spoiler alert: it's about as easy as filling out a perfect bracket. Our author took us to school with this one, reminding us that the economy is a wild and unpredictable beast, and even the best-laid plans can go out the window faster than a Cinderella team facing a powerhouse.

Number 8: "Dark Matter" - The Unknowables of Monetary Policy! Things got a little existential in May when the author dove deep into the "dark matter" of economics. We're talking about all those hidden forces that nobody can really measure or predict. He even dropped some Pearl Jam lyrics to drive home the point! Clearly, uncertainty was the name of the game this year, and we're not just talking about the Fed's forecasts.

Number 7: Powell's 21 Questions - Obfuscation and Evasion! Time for some press conference shenanigans! Remember back in June when Powell faced a grilling from those pesky reporters? It was like watching a masterclass in dodging questions. Our author decided to translate for us, revealing the "questions behind the questions" that Powell just wouldn't answer. Let's just say, transparency wasn't exactly the Fed's strong suit this year.

Number 6: "Trade Deadline" - The Balancing Act Continues! July brought more FOMC drama, and this time the author compared it to the MLB trade deadline. Apparently, setting interest rates is a lot like building a championship baseball team – you've got to make tough choices, manage expectations, and hope you don't blow it all up. Hey, nobody ever said this Fed gig was easy!

Number 5: March Madness: The Fed's Playbook?   Apparently, the Fed can learn a lot from college basketball. "It is impossible to be perfect" and "plans are worthless, but planning is everything." Deep stuff. Someone get Coach K on the FOMC!

Number 4: "Got Debt?" - Fiscal Concerns Take Center Stage! Remember that awkward family Thanksgiving dinner where everyone argued about politics and money? Well, that was basically the FOMC meeting in November. Debt and deficits were the main course, and Powell even admitted that unsustainable fiscal policy was a threat to the economy. Our author was practically screaming "I told you so!" from the rooftops, warning about the dangers of financial repression and the erosion of the Fed's independence. Pass the gravy, please!

Number 3: September Surprise: 50 bps Cut and a Dissent! Now we're getting to the good stuff! Back in September, the Fed shocked everyone with a whopping 50 basis point rate cut AND a dissent from one of the Governors. Talk about a plot twist! This was the moment the author really started pounding the table about the Fed's dovish turn, and it set the stage for the rest of the year's easing action.

Number 2: Market Memers Bow Down, Allow the Powell Rangers to Skate the Clock Out! The tension was palpable as December arrived. The Powell Rangers, bruised and battered from a season of battling inflation, were clinging to a narrow lead. Suddenly, the crowd erupted! Whispers of "normalization cuts" sent those 2-year yields tumbling faster than a meme stock on a bad day. The Memers, caught off guard by the Rangers' unexpected agility, could only watch in disbelief as the bond market surrendered. Victory was within reach!

And the Number 1 Play: Powell Rangers Snatch Victory from the Jaws of Defeat! The final whistle blew, and the scoreboard lit up with a second consecutive rate cut. The Powell Rangers had done it again! They had faced down inflation, navigated a treacherous yield curve, and emerged victorious. Sure, there were a few stumbles along the way (that Hammack dissent had some folks scratching their heads), but in the end, they proved that experience and a little bit of luck can go a long way. The Memers, left wondering what just happened, retreated to their locker room, vowing to return next season with a vengeance. But for now, the Powell Rangers are hoisting the trophy, basking in the glory of their hard-fought win.

FOMC Recap: Got Debt?

• Fed cuts 25bps to 4.50% to 4.75% range as expected
• The statement removed the sentence that the Committee had gained greater confidence that inflation was moving sustainably to 2%.
• "In the near term the election will have no effect on our policy decisions." "We don't guess, we don't speculate, we don't assume what policies will get put into place."
• Powell seemed to characterize the recent run up in bond yields as being driven largely by expectations around growth and decreased risk.  He further questioned whether there will be any persistency to the recent yield moves, characterizing the moves as "not a major factor" in how they are thinking about things"
• "We don't comment on fiscal policy" he further characterized the path of fiscal policy as "unsustainable" and a "threat to the economy" over time.
• Powell comments that he will not resign.

Raise your hand if you've heard a lot of recent talk about fiscal policy and deficits recently?

" Deborah Lucas was the moderator, and she asked a much more pointed question just right out of the gate when the panel started, and she asked, how much bearing does the fiscal theory of the price level or some version of that have on your thinking at the Fed?"

" if you take this theory seriously, it really undermines the whole point of the Federal Reserve"

The quotes above are from the David Beckworth's most recent episode of Macro Musings, during which he was discussing the Hoover Institution’s recent monetary policy conference, *A 50-Year Retrospective on the Shadow Open Market Committee and its Role in Monetary Policy*  with his guest Jon Hartley.

With so much post-election talk about the sustainability of debt, deficits and the like, along with some talk heading into the election around the Fed's independence and the occassional calls to end the Fed, I thought the comments above were interesting to consider.  After all if fiscal policy is a major driver of inflation how is the Fed supposed to fulfil their price stability mandate?

Is it an unspoken secret that the macroeconomic models include some budget constraint and some fiscal-monetary coordination.  As one of the leading proponents of the Fiscal Theory of the Price Level, John Cochrane would say that the Central Bank can move or smooth inflation over time, but that ultimately they don't have full control:  "the Fed’s interest rate target sets expected inflation, fiscal policy sets unexpected inflation."  and "the Fed makes a threat: If unexpected inflation doesn’t go where the Fed wants it to go, the Fed will blow up the economy with hyperinflation or hyper deflation. "  He also says "If you don’t like my little fiscal theory model, we don’t have a good model of the most basic question, how higher interest rates lower inflation, without a contemporaneous fiscal tightening." and "The news is that without such contemporaneous austerity, higher interest rates don’t lower inflation at all in standard models. Intuitively, if the Fed raises interest rates, that raises interest costs on the debt. Taxes must rise or spending must fall to pay those interest costs. If not, no reduction in inflation."

Which bring me back to my favorite quote about the role of central banks:

"I define central bank independence in one sentence, it's the ability to raise interest rates when the Treasury doesn't want you to. And the Treasury almost never wants you to, because of the cost of the debt.” – Peter Stella

I think my general commentary over the years (and here)  has been to remember that there is a lot of economics and finance that we just take for granted as to our understanding as to how it all works. If you’re reading this and are now questioning your worldview of interest rates and FOMC policy — good. 

Irrespective of the economic models you believe in, it's undeniable that that they all contain unobservable variables and are difficult to test empiracally. 

As for the FOMC today, Powell was well prepared for election related questions, including questions around whether he could legally be fired by the President.  He admitted that there are policies that come through Congress can have an impact on economic variables that will ultimately be taken into account.

Listening to the Powell presser, I was left largely with an impression that the FOMC is struggling to communicate what lane they are driving in, they're largely trying to say in the "middle" of the road. It sounds like they originally set a goal in the rate hiking cycle that they would bring inflation back to target, without declaring victory in terms of meeting that goal, they started to drive out of that lane and are now "in the middle".   

I'm sure there are some blogs or even self-help books out there about being stuck in the "messy middle".  Since I haven't read any of them, for my advice to the Powell Fed, I'll stick closer to my knitting and encourage Powell to listen to the wisdom the late, great Mr. Miyaki of the 1984 movie classic "The Karate Kid" gave to Daniel-san with regards to the risk of only being moderately committed to your goals.

“Walk on road, walk right side, safe. Walk left side, safe. Walk middle, sooner or later, get squish just like grape”