↪ re: Forward Guidance vs Maximum Uncertainty
Economists are not astronomers. We do not wish merely to describe, but also to counsel –Adam Brzezinski (et al)
→ econVuere:Vue ↪ September 17, 2024
The Federal Reserve Open Market Committee meets today. After Jackson Hole, and until last week, a 25 bps rate cut seemed to be a certainty. That changed suddenly last week and a 50 bps cut has been gaining currency. The odds suddenly became even — the very definition of what Jim Bianco calls maximum uncertainty — about tomorrow’s decision to go either 25 or 50 bps. Does a last minute shift in sentiment mean that forward guidance is no longer working? What role did the media play in Federal Reserve communications?
The Fed blackout period began on Sept 9th. All of this news occurred during a period in which they cannot comment, although former Fed officials have been unusually active. As Bill Dudley writes in Bloomberg:
I expect the Fed will do 50. I believe Chair Powell favors an aggressive approach: In his speech at Jackson Hole last month, he pointedly observed that a further weakening of the labor market — which seems to be happening — would be ‘unwelcome’.
This string of X quotes from some premier Fed watchers show how quickly interest rate forecasts have changed:
“Unless we get more stories to clarify things, I cannot find another meeting, going back to the 1990s, that was 50/50 a few days before a meeting. This is due to the Fed's bedrock principle of ‘forward guidance.’
Forward guidance means telling them what you will do before you do it. Now, we have maximum uncertainty. Did Timiraos' story wreck forward guidance? Was this the plan or an unintended consequence?
– Jim Bianco, Bianco Research • Sep 13, 2024 (@biancoresearch)
“The amount of cuts over the next few months ‘is going to be a lot more important than whether the first move is 25 or 50, which I think is a close call,'said Jon Faust, who served until earlier this year as a senior adviser to Powell. ‘I don’t think we’re in a spot that really shouts out for a preemptive 50…but my preference would be slightly toward starting with 50. And I still think there’s a reasonable chance that the FOMC might get there as well.’ Faust said he thinks the Fed could manage concerns about spooking investors with a larger cut by providing ‘a lot of language around it.
– Nick Timiraos, Wall Street Journal • Sep 12, 2024 (@NickTimiraos)
“I think the Fed should cut by 50 bps. I feel we overanalyze each data point for what it means on timing & size of rate move rather than ask what ‘level’ of rates is appropriate.
– Greg Ip, Wall Street Journal • Sep 15, 2024 (@greg_ip)
The Fed Decision
As we approach the Fed pivot on Wednesday, given surprising uncertainty about the amount the Fed will cut and why, how will markets react? A bigger than expected cut could signal that the Fed is concerned about the economy, but would not be unusual. When the Fed has changed course in the past, rate cuts have usually been greater than 25bps at the outset. But in many of those cases, the cuts were more or less emergencies:
A chart from Bianco Research that shows the volatility that began with the Wall Street Journal report on Sept 12th. The questions are, 1) what does 25 vs 50bps matter, and 2) does forward guidance still work? We will find out on Wednesday. What would I do if I were the Fed Chairman? One 100 bps cut, instead of stringing this process out over the rest of the year.
If you haven’t already signed up for our econVue panel discussion tomorrow at 4 pm to discuss the Fed decision and Jay Powell’s press conference, details and registration information below:
We are running a poll on Twitter right now and so far, it looks like 2/3 are saying 25 bps. Here is a link to the poll:
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