Fed through the looking glass.....
Fed through the looking glass.....
Fed Reserved.....
Last week, the FOMC (Federal Open Market Committee) met in Washington DC.
The FOMC was created by The Banking Act (1933) to formalise, with far greater scale and scope of powers and influence, the informal committee that had been established over a decade earlier, but had proven relatively ineffective in limiting the impact of the Wall Street Crash of 1929 and the Great Depression, although, as we recently explained, The Federal Reserve System was created by the people (of Wall Street) for the people (of Wall Street) and while it has a dual mandate (keeping investment banks happy and keeping commercial banks happy), its primary concern has inevitably been its Wall Street shareholders.[1] Just in case this wasn’t evident, the FOMC comprises
1. The seven Federal Reserve Board members.
2. The President of the Boston Fed or the Philadelphia Fed or the Richmond Fed (each taking one year turns)
3. Ditto the President of the Cleveland or Chicago Feds.
4. Ditto the President of the Atlanta or St. Louis or Dallas Feds
5. Ditto the President of the Minneapolis, Kansas City or San Francisco Feds.
6. The President of the New York (AKA Wall Street) Fed. (italics/emphasis added by MBMG)
All Federal Reserve Bank presidents, even those who are not currently voting members, attend FOMC meetings.
The Fed Chair has invariably also been appointed the FOMC Chair since the FOMC’s creation.
The previous informal committee had been established because open market operations by the regional Fed banks had been compromised when the twelve different regional Federal Reserve banks [2] had often bid against each other in securities markets, cancelling out each other’s impacts on macro policies
The FOMC is able to in theory anchor and in practice influence short-term interest rate expectations. It is legally mandated to meet four times a year, but in practice, having decided that you can’t get too much of a bad thing, has met 8 times every year since 1981.
Prior to last week’s meeting, we had published this handy MBMG guide to translating the real meaning of the meeting outcome:
If things are OK to moderately bad - I expect 25 Bps + lots of cheerleading
If things are worse than that - I expect 25 Bps + lots of cheerleading (because they have to pretend that things are OK)
If things are much worse than that - I expect 25 Bps + lots of cheerleading (because they really have to pretend that things are OK)
If Fed cut 50 Bps with lots of ra-ra-ra, then that means that things are cataclysmic and they want to see whether this is enough because it’s a long time until November, especially with an election in the way
Don’t rule out an emergency policy meeting before the election. That would mean that there’s a real crisis coming…..
Chair Powell announced the outcome of the meeting to the waiting world[3]
“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. Our economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state. Inflation has eased substantially from a peak of 7 percent to an estimated 2.2 percent as of August. We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2 percent goal. Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by 1/2 percentage point.” [4]
So, referring back to our handy guide this means-
“If Fed cut 50 Bps with lots of ra-ra-ra, then that means that things are cataclysmic and they want to see whether this is enough because it’s a long time until November, especially with an election in the way.”
Powell’s ‘ra-ra-ra’ continued –
“This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent……Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.”
Often Powell’s answers give the best insights into his ‘thinking’ than the prep-prepared statement above – when asked whether, based on his statement, that rates might run higher than expected next year, his answer was a model…. Of opacity-
“I think it would, the way I would really characterize it as this, I think people write down their estimate, individuals do, and I think every single person on the Committee, if you asked them what's your level of certainty around that, they would say there's a wide range where that could fall. So, I think we don't know, they're model based approaches and empirically based approaches that estimate what the neutral rate will be at any given time. But realistically, we know it by its works. So that leaves us in a place where we'll be, where we expect in the base case to be continuing to remove restriction, and we'll be looking at the way the economy reacts to that, and that'll be guiding us in our thinking about the question that we're asking at every meeting, which is; is our policy stance the appropriate one? We know, if you go back, we know that the policy stance we adopted in July of 2023 came at a time when unemployment was 3 and 1/2 percent and inflation was 4.2 percent. Today, unemployment is up to 4.2 percent, inflation's down to a few tenths above 2. So, we know that it is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment, moving to a more sustainable level, so the balance of risks are now even. And this is the beginning of that process I mentioned the direction of which is toward a sense of neutral, and we'll move as fast or as slow as we think is appropriate in real-time. What you have is our individual accumulation of individual estimates of what that will be in the base case.”
We ran this through our Fed-translator and it came up with –
“We really have no idea. We’re all just guessing but if you have enough people guess how many beans are in the jar, someone will get it right, won’t they?”
However, Charles Lutwidge Dodgson, better known as Lewis Carroll, has provided better insight into Fed think-
“’I daresay you haven't had much practice,' said the Queen. 'When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast.’[5]
After initial confusion, markets have settled into also believing six impossible things before breakfast and bought into the idea that this is pre-emptive and that such a huge panic measure is perfectly normal and that everything is just peachy.
We can’t see how a 50-bps rate cut can objectively be viewed that way.
We can’t see how it can be viewed as anything other than a panic measure wrapped up in glossy, unfounded, rhetoric.
We can’t see how markets can continue through 2025 to believe so many impossible things before breakfast every day.
Reality seems certain to bite.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
For more information and to speak with our advisory team, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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[1] Hold Up or Holed Up – MBMG Outlook, September 2024.
[2] Ibid
[3] A few special friends of the Fed have long had special access and don’t have to wait for official announcements.
[4] FOMC Chair, Press Conference September 18, 2024
[5] Through the looking glass – Lewis Carroll
[6] Alice in Wonderland Syndrome (AIWS) is a rare perceptual disorder, whose cardinal alteration is the unbalance between the self-representation and the external world, so that patients with AIWS may have an erroneous perception of their body size with respect to the external environment. In a central bank, it may give rise to delusions of unbridled power.