The Fed Announces
The Federal Open Market Committee announcement:
The bond market announcement:
Daily Treasury Par Yield Curve Rates
The hold is a disappointment but not a surprise. Inflation has eased a bit in recent weeks, as indicated by cooling asset prices. But the bigger risk at this point is the ongoing AI bubble, which is a product of accumulated years of easy money. The bigger the bubble gets, the greater the risk when it deflates. So while a case could be made for pausing on shorter term considerations, longer term concerns favor tighter monetary policy. We don’t have that yet … the one year Treasury yield closed last week at 4.44%, indicating a target rate of 3.75%-4.00% represents monetary ease.
So given a chance to back up the tough talk, the Fed whiffed. Two committee members agreed with me on a hike while ten voted to hold. Given that the hike votes were named as Cook and Hammack, Warsh was one of the holds, so I hold him personally responsible for not walking his talk. Inflation is still above 2%. As indicated above, policy is still easy. This Fed might be an improvement over the Powell Fed, but it’s still too milquetoast and too beholden to Wall Street for what this economy needs. The growing bubbles in crypto and AI – seeded and watered by years of easy money – need to be addressed ASAP … the bigger they get the greater the damage. Turn the water off now.
Apparently the Fed press corps is a little piqued too. Multiple questions are variations of why didn’t you hike? Warsh pulled out the all-purpose non-answer of wanting to get more data. Sorry, but there are always more data ahead. And no amount of data you get tomorrow will change the decision you made today.
Warsh opened with strong words about the economy being robust and inflation too high. He declared “we will deliver price stability, no ifs ands or buts”. But the action wasn’t there.
It’s likely the cognitive dissonance is due at least in part to the upcoming elections. For a supposedly apolitical Fed, that’s no excuse, but it might be an explanation. (It might also help explain the usually dovish Fed press corps brazenly questioning the Fed’s non-hike.) You could make a case that little good purpose would be served by having the next couple weeks of political noise be made even noisier with Trump bashing the Fed over a rate increase. I’ll give Warsh a pass … just this once …
Is this the “more data” the Fed was waiting for?
Third-quarter U.S. GDP increases a better-than-expected 3.4% as September inflation accelerates
“The pace of price increases stepped up in September, keeping inflation well above the Federal Reserve’s target, while the economy grew faster than expected in the third quarter …”
I take the two votes in favor of a hike as an indication of intent to hike at the next meeting in December. We surmised similarly before the Fed hiked September 16. Absent some major unexpected event or data surprise before then, expect a quarter point hike December 10.
Today’s stock declines – if continued – would qualify as an event that could moot a December hike. Gold is down sharply too, indicating an appreciating dollar … a broad decline in asset prices is exactly what is needed to take the pressure off consumer prices, and by extension off the Fed.