Print
With the Fed’s regular meeting scheduled to conclude today, there has been a tremendous amount of commentary around what the Fed is going to do, what it should do, what it might do, and so forth. The consensus is that the Fed will raise rates 25 bps and then signal—something—going forward.
I agree with that conclusion. But I disagree with the general discussion we see and would like to suggest a different way of looking at not only this meeting, but also the meetings to come. It’s simply this: let’s look at what the Fed is tasked with doing, look at the data, and then compare the two. That analysis should tell us everything we can reasonably know about what will happen today.
Looking at the Fed and the Data
Let’s start with what the Fed is tasked with doing. Formally, there are two things: price stability and full employment. Unofficially, the Fed has also focused on market stability, but the first two are its actual job—and that is the data we need to look at.
When we do, we see that employment is still very strong and that inflation is still too high. Given the assigned tasks and the data, the answer for what the Fed will do today is pretty clear: keep raising rates. And that is where we are. We can reasonably expect an increase today and a signal that the Fed will keep raising rates until inflation is under control.
That shouldn’t be a surprise, as that is what the Fed has been saying for years now. And while things have improved, the inflation problem remains. But it is often a surprise, because markets tend to talk themselves into thinking the Fed will cut, has to cut, or should cut. Wishful thinking substitutes for analysis, until the facts reassert themselves.
Breaking the Cycle
So, how do we get out of this woulda/coulda/shoulda cycle? By asking a different question. Instead of asking when will the Fed cut rates, let’s ask why would the Fed cut rates? Presumably, the Fed will cut rates when it needs to, but not before then. So, when would that be?
Again, let’s go back to the Fed’s responsibilities—employment and inflation. When employment is a bigger problem than inflation, it will cut rates. When the two are about equal as problems, the Fed will stop the increases. Right now, inflation is a bigger problem than employment, so more increases are very likely and cuts are nowhere to be seen. Expect to hear that today at the Fed press conference. Lots of things could happen, but the data and the Fed’s responsibilities control what will happen. That is what we need to focus on.
Moving Forward
It doesn’t have to be that complicated really. Let’s keep our eyes on the ball here and not worry about what might happen or what could happen. What is happening gives us enough data to move forward.
