Waiting for the Fed
Mixed messages have been emerging ahead of tomorrow’s monetary policy decision from the Federal Reserve. Here’s a reminder of the rollercoaster that left the Fed’s September decision as one of its move important post-Covid meetings. In the face of cooling inflation, the Fed begins a relatively aggressive interest rate cutting cycle, adjusting rates lower by 1% in little over three months at the end of 2024. Come 2025, noting the risk of tariffs and a healthy labour market, the Fed decides to hold rates in this more moderately restrictive area that they have now landed.
Skip forward a few months, and the economic world is being turned upside down by astronomic tariffs changing almost daily. The Fed sees that tariff turbulence as almost certainly inflation positive but critically also as only a one-time adjustment in prices, not an ongoing source of inflation. Still, with a jobs market that’s very strong, why not wait and see instead of getting burned by the ‘inflationary will be transitory’ narrative that left the Fed embarrassed post-Covid? So, it does. Now, leap with me another few months forward and we know that the solid jobs numbers being printed weren’t quite as reliable as the initial estimates claimed.
Revisions in labour market statistics show that the red-hot economy was significantly cooler than portrayed in the data. Indeed, as of Q3, there is very little evidence of fresh hiring in the US and near stagnant domestic consumption. The conclusion: a rate cut tomorrow. The big debate for now is whether the Fed leads with a 50-basis point cut as it did in September 2024 (unlikely I think) or a 25-basis point cut this time around. In addition, warnings are now circulating that if the presentation of tomorrow’s decision leads to the conclusion that this cut is also motivated by political influence then the path for equities and bonds may not be so favourable.
Discussion and Analysis by Charles Porter
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