The Fed's Great Pretense

A memo from the desk of someone who actually read the fine print

TO: Subscribers who understand that "data-dependent" is Fed-speak for "we haven't decided yet"
FROM: Your correspondent, caffeinated and cynical
RE: The Theater of Monetary Policy

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Jerome Powell stood at Jackson Hole last Thursday and delivered what the financial press breathlessly called "dovish signals." The chair suggested that conditions "may warrant" interest rate cuts as the Fed proceeds "carefully." How wonderfully noncommittal. How perfectly Powell.

The markets, predictable as gravity, surged on Friday morning. Stocks jumped higher as traders cheered signals from Federal Reserve Chair Jerome Powell's remarks that the central bank might cut interest rates in September. Because apparently "may warrant" and "might" are the new "definitely will" in translator speak.

Here's what actually happened: Powell gave a masterclass in saying nothing while appearing to say everything. He acknowledged what everyone already knew - that labor markets are cooling and inflation is moving toward target. He nodded toward the possibility of easing. He used phrases like "proceed carefully" enough times to make it sound profound rather than paralyzed.

Meanwhile, the August FOMC minutes revealed the reality behind the curtain. The meeting summary depicted a divergence of opinion among the central bankers, whose vote to hold their key rate steady came despite objections from two Fed governors who argued in favor of cutting. Two governors wanted to cut rates at the July meeting. Two. Out of twelve voting members. That's not consensus building - it's barely controlled dissent.

The schizophrenia runs deeper. The Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent while simultaneously telegraphing cuts. They're holding rates steady because they're confident about cutting them. Makes perfect sense if you've spent enough time huffing central bank communiqués.

But let's talk about what's really happening in the data while everyone fixates on Powell's verbal gymnastics. The S&P 500 closed at a new record high on Wednesday, while the tech-focused Nasdaq finished 1.3% below its recent peaks. The broad market settled up 0.41% at 6,465.94 on Monday.

Record highs. With rate cuts supposedly "warranted" because of economic softening. Either the market is pricing in a goldilocks scenario where the Fed cuts rates into strength, or we're watching another episode of "this time it's different." Spoiler: it never is.

The real tell came buried in the framework review that Powell also announced. The Fed reaffirmed its commitment to its 2% inflation target after spending months discussing whether that target might need adjustment. Translation: we considered moving the goalposts, decided against it, and want credit for maintaining our credibility while simultaneously preparing to ease policy before we've actually hit our target consistently.

The US500 rose to 6468 points on August 27, gaining 0.02% from the previous session and climbing 15.65% compared to the same time last year. Fifteen percent gains while the Fed contemplates easing. Someone explain the emergency here.

What we're witnessing is the Fed's great pretense: that monetary policy can be both data-dependent and forward-looking, both measured and responsive, both hawkish on inflation and dovish on employment. Powell wants to cut rates because labor markets might be softening while asset prices continue their march toward the stratosphere. He wants to appear both prudent and preemptive.

The truth is simpler and more uncomfortable. The Fed painted itself into a corner with aggressive tightening, then discovered that the economy is more resilient than their models suggested. Now they're looking for reasons to ease that don't make them look foolish for having raised rates so high in the first place.

September will bring either vindication or embarrassment. My money's on embarrassment, delivered with the kind of verbose explanations that make you nostalgic for the days when central bankers just moved rates and shut up about it.

The market will probably rally either way. It usually does.

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