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” 

 

Daily Economic Update: September 19, 2024 (Kind of a FOMC Recap?)

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.

FOMC Recap: FOMC Trade Deadline Edition

• The Fed held their policy rate target range at 5.25% to 5.50% as expected
• The FOMC Statement made changes to indicate a moderation in the employment picture and a slowing in the inflation picture. Noting that they are attentive to risks to both sides of their dual mandate.
• Powell said the FOMC does not making policy decisions based on an outcome of elections that haven't happened yet.

With the MLB trade deadline passing on Tuesday, the FOMC faced their own decision deadline today. Like MLB GM's, FOMC officials know the importance of making decisions with their goals in mind.  In the case of a MLB GM the pinnacle goal is winning the World Series.  For the Fed the pinnacle goals are low and stable inflation, maximum employment and moderate long-term interest rates, or more generally stated, fostering economic health.  

Every FOMC meeting is like the MLB trade deadline.  Just as MLB GM's need to decide whether to add or subtract to small parts of their roster or to wholesale change direction, the FOMC needs to decide what to add or remove from their statement, whether to do more or less of something they are currently doing with their policy tools, or in times of crisis deciding to do something they've never done before.  Like MLB GM's and all of us, the FOMC is making their decisions with their goals in mind, trying to face reality as it is, and prudently balancing going for it now against the risk of harming the future.  MLB GM's and FOMC officials face the added task of communicating their decisions to the public in a way that manages expectations.

There is often a realization that what got the team to where they are today won't get them to where they want to be, that when things stop evolving they stop compounding.  Every coach and manager knows that small decisions can lead to big results, especially when those decisions lead to actions that are able to use time to compound (long and variable lags anyone?).  They also know that bad decisions can compound in a negative way.  

While MLB executives would like to believe they have one goal or priority, which is winning a championship, the reality for some (most) franchises is they have a dual or multiple mandates, like the FOMC, and have to balance competing priorities that can often be in tension.  In many cases we have to prioritize one goal over another.  In the words of Greg McKeown:

"The word priority came into the English language in the 1400s. It was singular. It meant the very first or prior thing. It stayed singular for the next five hundred years. Only in the 1900s did we pluralize the term and start talking about priorities."

Further it was once written (you can find it, but I won't bias it):

"No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. " 

I'm no Fed sympathizer, but the decisions the Fed has to make are hard. The decisions we all make are made under uncertainty and hard.

The decision by the FOMC today to make statement changes reflects the reality of the recent economic data they have consumed since the last meeting.  By not making any change to the policy rate today, the committee feels that progress toward their goals remains on a path they find acceptable.

It's hard to know exactly what questions the committee asked themselves as they made their decisions, but hopefully they collectively reached their decision based on their honest assessment of the state of the economy, without interference of political or external pressures, in a state where they were less concerned with their personal futures, uninfluenced by past criticisms, and more concerned with recognizing their decisions impact a complex ecosystem and need to be made with an eye toward protecting the people from undue harm from their decisions.  That is probably good a lens to make any decision (you can find many of these principles embedded in Charlie Munger's investment decision making).

The modern world loves to cling to a belief that everything can be controlled. There is probably a hefty "illusion of control" we place in the Fed, despite the fact that macro-forecasting is impossible (see Howard Mark's last memo).  Perhaps Powell said it best today:

"Certainty is not a word we have in our business".

Rather than be anxious to find certainty from the FOMC, perhaps we should rejoice that it is uncertainty that sets us free.  The best we can hope for out of the Fed is sound decision making guided by principled questions.

FOMC Recap: I've got 21 Questions Behind the Questions at the FOMC Press Conference

 

• FOMC held policy rates at 5.25% to 5.50% as expected
• FOMC statement characterized progress towards reaching the 2% target as "modest further progress" while continuing to characterize growth as "strong" and unemployment as "low"
• The SEP (Dots) Median dot showed 1 hike projected for remainder of 2024 vs. 3 in the March Dots
• The median longer run neutral rate was also raised to 2.8% up from 2.6%.

We spend a lot of time thinking about the FOMC statement and press conference, but do we really pay much attention to the questions the reporters in the room ask?  We know the questions are generally tame, perhaps you remember what happened to Pedro Da Costa when he asked Yellen a tough question back in 2017.  You also know Powell's answers are generally all non-answers.  So does anyone actually pay attention to the press conference?

Well today we are going to focus on the questions and try to get to the questions behind the questions.  Please note that the "Actual Question(s)" are paraphrased from reporter questions during the press conference.

1. Actual Question: Walk me through the average inflation forecast of 2.8% by year end, it's already 2.75% and forecasted to be lower, do you expect inflation to get worse?
   Question behind the Question:  How do you guys actually come up with your forecast / what are you smoking?
   
   
2. Actual Question: If you have this wrong and inflation is rising is the outlook for rates wrong?
   Question behind the Question:  Are you going to pull a Lagarde and cut rates while rising inflation forecast?
   
   
3. Actual Question: Would more inflation readings like today make a September cut possible?
   Question behind the question: You say you're data dependent, so can you please just tell us what the data needs to show you so you are willing to cut rates?
   
   
4. Actual Question: Did anyone change their projections after the inflation data today?
   Question behind the question: If there is no consistency with how people make their projections, do these dots mean anything?
   
   
5. Actual Question:  How do you view the labor market and how it gets us back to 2%?
   Question behind the question:  Do you still think 'there will be pain' to get inflation back to 2%?
   
   
6. Actual Question: How do you interpret the differences in labor market survey data?
   Question behind the question:  It looks like these surveys are a shit show, can we even rely on the jobs data?
   
   
7. Actual Question: Why did the committee shift down their rate cut forecast?
   Question behind the question: You say you're data dependent, if the data is moving your way, why are you moving the other way?
   
   
8. Actual Question: How should we interpret the rise in the long-run neutral forecast?
   Question behind the question:  You guys have no clue about r-star, right?
   
   
9. Actual Question: Should we conclude that you guys realized you haven't been as restrictive as you think you are?
   Question behind the question: Again, do you guys have any clue as to whether your policy is actually restrictive?
   
   
10. Actual Question: If policy is restrictive why does growth and unemployment not change in your forecast?
    Question behind the question: How many times do we have to ask you whether you can explain how your policy works and how you determine these projections?
    
    
11. Actual Question: Your growth forecast sees no slowdown and unemployment isn't worse, and inflation isn't falling, why do you need to cut rates this year?
    Question behind the question: Either your forecast is wrong or the way you describe your policy is working is wrong, which is it?
    
    
12. Actual Question: Is there concern for housing and financial stability in leaving rates where they are?
    Question behind the question: Are you really just planning to cut rates to bail out certain industries?
    
    
13. Actual Question: People are unhappy at the prices at the grocery store, it doesn't seem like there are still a lot of inflationary pressures in the economy, could you tell us more?
    Question behind the question: Can you tell me again why people hate inflation?
    
    
14. Actual Question: Can you give us a sense of what one rate cut would actually do to the economy?
    Question behind the question:  Why are we all here wasting our time talking about one rate cut?
    
    
15. Actual Question: Is there something about what happened in the first half of the year that you think differently about now?
    Question behind the question:  You guys were so wrong to start the year, did you learn anything?
    
    
16. Actual Question: What is your message to American's who see good data, but feel unhappy about the economy?
    Question behind the question: Do you think American's don't understand economic data, or are they right and inflation just sucks that bad?
    
    
17. Actual Question: Borrowing money is expensive, about when will you lower rates?
    Question behind the question:  People liked free money, when can people get back to getting free money?
    
    
18. Actual Question: What data have you found that is encouraging to you?
    Question behind the question:  You said data matters, can you please just tell us what data matters and where it needs to get to for you to be happy?
    
    
19. Actual Question:  Is your conservatism really just concern about stickiness of housing inflation?
    Question behind the question: Why do we use OER in our inflation measures?
    
    
20. Actual Question: The last jobs report showed more people working multiple jobs, people are paying for things on their credit cards, what will cause a breaking point for spending?
    Question behind the question: Do you really believe the economy is doing as well as the data shows, or is it all a facade?
    
    
21. Actual Question: Can you tell me what you look at in the labor market to decide when to cut rates?
    Question behind the question:  My god, I've been sitting in this press conference for almost an hour, will you please just tell us what data matters?

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.

FOMC Recap: What lessons can the Fed learn from March Madness?

 

Let's be realistic, in 24 hours no one is going to be talking about this FOMC meeting, after all tip-off to the round of 64 of the NCAA Men's Basketball Tournament, "March Madness", is less than 24 hours away.  What lessons can the Fed learn from March Madness?

There's just something about March.  Dating back to 44 BC and the assassination of Julius Caesar, March has been associated with turmoil and uncertainty.  Shakespeare's famous line "Beware the Ides of March" certainly continues to portend bad omens in today's popular culture.  Away from ancient Rome, March has indeed had it's share of ominous moments in financial market history, just to name a few: March 2023 saw the failure of Silicon Valley bank, March 2020 saw some of the largest single day moves in rates and stock prices during Covid, March 2011 was the Japanese earthquake and Fukushima disaster, March 2010 was the height of the Greek debt crisis, March 2008 was the collapse of Bearn Stearns...you get the point.  Nevertheless, it's easy to forget the specific dates or even that the aforementioned financial market events all happened in March.

"March Madness", the basketball version, has better marketing and is less forgettable than financial market history. Like the fortuitous events that have occurred in the month of March over history, the NCAA version of March Madness is often filled with unexpected events, upsets and Cinderella stories.  We can remember 16 seeds (UMBC and FDU) upsetting 1 seeds, we can remember Christian Laettner's "The Shot", we can remember the Cinderella runs of N.C. State, Villanova and others, as well as the many future stars who became household names as a result of their play on the biggest stage in college basketball. 

The Fed can learn many lessons from March Madness, including:

• It is impossible to be perfect:  The odds of completing a perfect bracket are a number that is incomprehensible.  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.
• Plans are worthless, but planning is everything (Dwight D. Eisenhower): In Eisenhower's words, "There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of "emergency" is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven't been planning you can't start to work, intelligently at least.  That is the reason it is so important to plan, to keep yourselves steeped in the character of the problem that you may one day be called upon to solve--or to help to solve."
  Every college coach knows that you have to take in the data, do your homework and come up with a plan to attack your opponent.  In the same vein, every coach knows that their team has to survive the proverbial punch to the face.  The biggest stumbles in March Madness occur when some top seeded team, faces a team that comes out with a different style than expected.  When that higher seed fails to make any adjustments, upsets often follow.  The Fed can learn that sometimes things don't go according to plan, it doesn't mean you shouldn't have watched the film, taken in the data, etc. it means that as you watch the film and take in the data you need to make your plan robust and be willing to revisit and adjust. Just as good coaches call time out and get to make adjustments at halftime, the Fed needs to remember that sometimes what they thought was going to work, doesn't work as planned.   Maybe the Fed should consider this as the take in current inflation data.  Sometimes you have to change your defense to stop the streaky shooter.  Maybe inflation is today's streaker shooter and the Fed needs to step up it's defense. To the Fed's credit they are often very good at making adjustments when it matters most.  

While there are many more lessons the Fed and financial market participants can learn from the NCAA tournament, the primary lesson is one of learning that the future is uncertain, expect the unexpected and that anything can happen.

I'll end there, but if you want a little more on uncertainty, risk management and the parallels to the NCAA tourney, read on...

FOMC Recap: What did the man in the orange hat say today?

 

What did the man in the orange hat say today?  

Is the correct answer, “I don’t know, and I don’t care”?

On a long enough horizon, how many times the Fed cuts rates in 2024 is just a bump on the long, unmapped road that investors need to navigate, a road that is filled with plenty of uncertainty.  A road where the only certainty is that there will be some unexpected twists and turns along the way.  Those that can navigate the unforeseen and the short-term setbacks on this journey are likely to reach their destination, those that attempt shortcuts and are reckless may not.  We all know that the game of predicting the future is a tough one, filled with many losers, so speeding down the road in search of returns based on prediction alone may not always end well.  We have plenty of recent experience to know that the biggest shocks to the economic system tend to come without warning.

Speaking of uncertainties, 2024 is an election year.  Appointed to lead the Fed in 1979, Paul Volcker was no stranger to election years.  In his memoir, Keeping At It, Volcker recounts the story of a meeting in the summer of 1984, an election year, where he was summoned to the White House to meet with President Reagan.  The message from Reagan’s Chief of Staff, Jim Baker, was “The president is ordering you not to raise interest rates before the election.”  Volcker laments that he wasn’t planning on tightening policy at the time and the dilemma he faced in deciding whether to report the incident (he didn’t), stating, “How could I explain that I was ordered not to do something that at the time I had no intention of doing.”  Volcker describes the whole incident as a “striking reminder about the pressure that politics can exert on the Fed as elections approach”.

The Powell Fed may find themselves in a similarly tricky political position.  The Fed may believe that cutting rates is the correct policy but potentially worry that cutting rates later this year may look to be politically motivated, or vice versa.  In navigating the politics of an election year, Powell would be wise to heed some advice from Volcker’s memoir, specifically the importance of credibility 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…”

So much attention is focused on predicting what the Fed will do next, but what really matters for navigating the long road to investment returns is the institutional credibility of the Fed, ultimately earned not by words, but by actions.  Actions that ultimately create a stable environment for businesses to do their job of solving the world’s most difficult problems.  Actions that at times mean changing interest rates and at other times finding creative solutions to keep the banking system from imploding.

In maintaining the independence and power of the Fed that ultimately backs its institutional credibility, which is necessary to foster a trusting and stable business environment, my advice to Powell is to revisit Robert Greene’s book The 48 Laws of Power with specific consideration to the following of Greene’s laws:

              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.

              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.

              Law 9: Win through your Actions, Never through Argument:  Winning an argument gives you momentary advantage but winning through actions gives you lasting power. Actions demonstrate competence and create value, whereas words, often in arguments, lead to negative emotions and resentment.

               Law 20: Do Not Commit to Anyone: It is the fool who always rushes to take sides. Do not commit to any side or cause but yourself.  By maintaining your independence, you become the master of others.

Following these laws, over the long run, the Fed can maintain its reputation for fostering sound money and financial stability. For all the criticism, controversy, mistakes, and triumphs attributed to the Federal Reserve, as an institutional system, it has served the country well.  In Volcker’s words “…it remains a precious asset for the country in troubled times.”