“We need some anchor in this economy, because otherwise it’s going to get really complicated going forward.” -Mohamed El-Erian
“This meeting was a mess.” -Jim Bianco
The market got what it expected in a 25bps cut, but Fed watchers aren’t happy.
Let’s unpack the setup and discuss the Fed’s problem amidst the wider setup of Trump 2.0 and where the US finds itself financially, economically, geopolitically, politically, culturally etc.
The Hawkish Cut
Jerome admitted that the 25bps cut was a “risk management” cut — he the explained that…
You know, it is such an unusual situation. Ordinarily, when the labour market is weak inflation is low, and when the labour market is really strong, that's when you gotta be careful about inflation. So we have a situation where we have two sided risk, and that means there's no risk free path.
Chair Pow-Pow here is saying that he wishes inflation was high with jobs strong so he could keep rates high with no one shouting at him — but now that inflation is sticky and jobs are turning over, he doesn’t know what to do.
….Ok, he *does* know what to do — posture political and cut by 25bps to play ball and get Trump off his back.
Quantitative Tightening is still on by the way…
The “Transitory Inflation” Event
The market is not giving enough attention to this and how the Fed has changed its ways as a consequence of it.
The Fed used to be an anchor where decision makers could turn to in times of great uncertainty — but the fallout associated with the transitory inflation event changed all that.
The Fed went from forward-looking and proactive to political and reactive. But it gets more complicated than that — I don’t think transitory inflation is the only reason for this.
Let’s look into how the Fed, dynamics around the Fed and the general environment have been changing — and how that is changing the face of global macro entirely.