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FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
The author is Chancellor of Queen’s College, Cambridge, and an advisor to Allianz and Gramercy.
“We don’t speculate, we don’t make assumptions, we don’t make assumptions,” Jay Powell said last month. This is what he said in response to a question about whether he was doing so. Investors and economists are trying to determine whether this remains true amid the volatile market volatility following last week’s Fed policy announcement.
The inherent uncertainty surrounding the answer to this question is just one way the Fed’s highly reactive policy approach amplifies financial volatility. The reaction in long-term bond yields also explains why Americans are immediately puzzled by the rising costs of the mortgages they are considering as soon as the media reports that the central bank has cut interest rates.
The Fed cut interest rates by 0.25 percentage points at Wednesday’s policy meeting, along with more hawkish forward guidance. This suggested that the rate cut in 2025 would be smaller than previously indicated, and that the central bank’s long-term target ultimate interest rate would be raised. The chairman’s subsequent press conference was the most chaotic and chaotic in a series of less-than-stable events in recent years. It was full of contradictions.
Powell has at times said that a recent set of “flat” inflation indicators means the Fed’s approach could be “more cautious” in future monetary easing. He also said the central bank’s policy stance remained “meaningfully restrictive” after Wednesday’s rate cut.
Under these circumstances, it is not surprising that both stocks and government bonds showed unusually large intraday price movements for a Fed Day. The S&P 500 index fell 3%, and the 10-year Treasury yield rose more than 0.1 percentage point. The change in yields was the biggest Fed day since the so-called taper tantrum in 2013, when the Fed suggested it might start tapering its bond purchases, and the S&P 500 posted its biggest decline since 2001. did. Considered Wall Street’s “fear gauge,” it soared from about 15 to its day’s high of 28.
The market’s view of the now “stop-go” Fed was equally volatile. Pointing to Chairman Powell’s reference to a “new phase,” the Fed said officials are considering the impact on inflation of the incoming administration’s trend toward deep workforce reductions through tariff hikes, deep tax cuts, and large-scale repatriations. Some argue that it is considered to be the case. About illegal immigration. Some blame the shift to hawkishness on inflation trends that have once again surprised and confounded the world’s most powerful central bank.
There is no definitive answer to this important question, but as I have lamented before, there are also more persistent forces at work here that continue to be underestimated by many. Wednesday’s announcement is part of a larger pattern of flip-flopping.
As an example, the Fed’s actions over the past five months have ranged from no rate cut (at the end of July) to a large 0.5 percentage point “recalibration” rate cut (mid-September) to a 0.25 percentage point cut. From a seemingly “nothing to see here” pace (early November) to a reversal of previous forward policy guidance and economic interpretation (mid-December).
Also note that there are considerable internal differences. An updated “dot plot” of policymakers’ economic forecasts shows a surprising range of predictions for how much the Fed should raise interest rates by the end of this cycle, from less than 2.5% to almost 4%. There is.
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A persistent lack of strategic policy consolidation helps explain the current policy confusion. The Fed became overly reliant on data after making a big mistake on inflation in 2021-2022 when it mistakenly assumed the price spike was temporary. As a result, policy will lean in the direction supported by the latest data, leading to a change in direction.
Market participants were understandably uncomfortable listening to Wednesday’s press conference. In addition to speculating on the significance of the Fed’s latest reversal, they also need to accept a more fundamental reality. In other words, the central bank’s continued excessive reliance on data is increasing uncertainty in the US economy.
This matters beyond the United States, because America’s exceptional economy is currently the only meaningful engine of global growth. The result will be heightened risks from global and domestic political forces that are currently rippling around the world, exacerbating the domestic challenges faced by countries from Brazil to Japan.
