· Former Fed Governor Warsh is on the tape effectively saying the 50-basis point policy rate cut by the FOMC in September was a mistake.
The summer growth scare has been acknowledged, with a focus on retroactively underweighting the signal coming out of the past weakening labor market and a simultaneous overweighting and forward projection of backward-looking data such as GDP/GDI and inflation data.
Regardless of who wins the U.S. presidential election, it is now assumed that deficits will continue to widen and raise U.S. treasury yields.
A red-hot economy will reverse the disinflationary impulse that has been experienced this year.
All the above has led to dominant expectations of an ever-steepening yield curve and increasing equity risk.
Individually, each of these views may or may not have merit somewhere on a broad spectrum. As a packaged aggregate, however, the suggested narrative is misplaced.
Governor Warsh’s comments make for great commentary in the infortainment space but are irrelevant to the market. He is a former policy maker with another opinion in a crowded room.
Beyond that, the policy rate cut has been made and priced. The focus should therefore be on the first-order consequences of the cuts and their second order feedback loops.
To render a judgement of a policy mistake, we must understand the FOMC’s policy cut in the context of their strategic policy objectives, found in the SEP and in the information in hand at the time.
Going into the September FOMC meeting, the U3 rate stood at 4.2%, above the June SEP projection. Core PCE for August was expected to run sub-2% SAAR. And the year-end U3 dot was subsequently moved up to 4.4% to reflect the downside risks to the labor market.
That those risks have not materialized because of, or despite, the Fed’s aggressive front loading of rate cuts is a subject for academic debate amongst the egg heads. We are still waiting for the data to evolve with a lag. Today’s positive vibes are an echo of the pullback in rates in late July and August.
At the September post-FOMC presser, Chair Powell mentioned “anecdotal data, like the data in the Beige Book” as a factor in the FOMC’s decision to cut 50-basis points. This was not the first time he leaned on this data set to bolster his actions in leading the policy discourse, thus he is clearly a believer.
The latest Beige Book signals a still-slowing economy, with mixed consumer spending, consumer price sensitivity, and margin pressures. The Fed’s business contacts are not recessionary in their outlook, but their interactions signal a need to keep cutting rates in the coming months to keep the soft landing (declining inflation and a resilient labor market) intact.
Despite the string of stronger than expected backwards looking data, such as employment, retail sales, and consumer inflation, the Fed’s latest Beige Book signals a forward-looking weakening of the economy.
“Economic activity was little changed in nearly all districts since early September, though two districts reported modest growth”.
This on its own seems fine and nothing to get worked up about. However, the prior Beige Book reported 9 out of 12 districts had flat or declining growth. If activity is little changed relative to that, and that activity was flat or declining, then there is signal value in the quote above.