The Fed Announces

The Federal Open Market Committee announcement:

FOMC 20240918

I used to subtitle these Fed Day posts “The Fed Decides”. As it became clear that the Fed has already decided what it’s going to do well in advance of the official announcement, I changed it to “The Fed Announces”. Even that has become rather pro forma, since the Fed has already told us what it’s going to tell us.

It’s no different today. Only financial cave dwellers wouldn’t have known the Fed was going to announce a rate cut. And because, as I’ve been insisting for years, we investors are better off paying no attention to Fed chatter anyway, but instead watching the bond market. It started cutting rates five months ago. And these are rates that a thirty five trillion dollar borrower is borrowing at, and rates that you can actually earn on your investments. Can you borrow at Fed funds? Do you earn it in your bank account? I’m beginning to question whether even to continue covering routine Fed Day announcements with posts like this. The only value it has is to provide a convenient springboard for critique and possibly infotainment.

The only unknown with this announcement was whether the cut was going to be 25 or 50 bp. Relevant to a small minority of Fed funds futures traders, but otherwise way overhyped. In six months it will have been forgotten. By then the media will be obsessed with how low will it go and few will even remember whether this meeting was 25 or 50. And still, wherever the Fed is going, the bond market will have been there first.

So any significance is, well, transitory. Wall Street is clamoring for 50, because, easy money is like shaping the whole country into a funnel with Wall Street at the mouth, but it could also be taken as a sign of veiled panic. A dovish 25? This isn’t economics, folks, it’s theater.

Don’t count on any other sustained sequalae. Wall Street media has it that now stocks are about to take off. But it’s been pounding that drum for at least a year, so you have to wonder how much left there is to price in. It’s also noteworthy that the Fed started a rate cutting cycle in September 2007 (How big a deal was that six months later?). I’m not suggesting we’re on the cusp of another 2008, but the apparent certitude of the media that it’s all bull from here sure isn’t justified. It’s more likely calculated to goad the despised “retail” investor into paying up for Wall Street wares. Corporate financial media is far less interested in telling you what’s good for you than what it wants you to do.

And the Fed is more interested in what’s good for Wall Street. Inflation today for Wall Street, inflation tomorrow for Main Street. Give it another 24 months or so. In the fullness of time, the Fed’s confidence that inflation is contained will have proven to be just as justified now as it was during that embarrassing “transitory” phase that preceded its last round of hikes.

At least today the Fed officially announces something of substance. It is reducing its Fed funds target rate. So between Wall and Main we already know whose side the Fed is on. It’s sowing the seeds for the next round of consumer inflation before the last one is even a memory. Ultimately though, all cynicism aside, today’s Fed move may be mostly explained by what I alluded to above; it’s playing catch-up to the bond market.

That’s far from the only problem though. If the Fed already told markets it was going to change policy, it already decided a policy change was appropriate. Why then, didn’t it make the change when it was appropriate? In this age of advanced digital communication, they can’t possibly represent that the only way they can make a decision is to physically meet around a table. Regardless these people are way too highly paid to work only sixteen days a year. If their policy decisions are even remotely as vital to the well being of the American people as the media represent, then implementing policy as soon as it’s appropriate is essential, and delay economically destructive. The notion that the economy should wait until a predetermined date on the calendar is archaic at best.

And why can rates only move in long unidirectional series? Establishing this as the normal course of business puts the Fed even further behind the curve because it means it has to wait for enough evidence for a whole series of moves just to make one. Why should rates not be tweaked on a weekly basis? Markets do it. If stock prices crash or the dollar dumps rates can be be tweaked the same week without it having to be deemed an emergency. Adjustments of a few basis points either way ought to be a weekly routine, obviating the built in being behind the curve or operating without feedback. But that would violate the Fed’s dogma of telling the markets what it plans to do months before it does it.

Does anyone think it odd that there is a superficially healthy debate, on a daily basis, about what Fed funds rate the FOMC should announce at its next meeting? That yet when it comes to the basic conduct of monetary policy, can anyone name a single instance in the economic or financial media where someone, aside from your correspondent, has publicly either justified or questioned a canon of Fed liturgy prescribed neither by law nor economics?

With its rigid adherence to articles of faith, the conduct of monetary policy more closely resembles religion than economics.