00:00This was a nine to three vote, three dissents. This was the first time since 2019
00:04that you had three officials vote against the decision and you had this
00:08on both sides of the policy spectrum. I know that the three dissents in particular were perhaps
00:13expected here, but if we continue down this path, if we see more discord among the FOMC,
00:20at what point does it start to become counterproductive or start to complicate
00:24the Fed's messaging here? I don't know whether it affects the Fed messaging,
00:30but I think it makes it much more challenging for whoever the new Fed chair is, that there's a
00:36committee that doesn't seem particularly inclined to significantly decrease interest rates over the
00:42course of next year. So with this dissent, there were two presidents and one governor. The governor
00:49Myron thought that there should be a deeper cut and the two presidents presumably concerned about
00:56inflation being too close to 3%, not close enough to the 2% target. We're worried that we weren't
01:04putting enough weight on inflation and as a result, dissented for no change.
01:09It was interesting too, to hear Jerome Powell weigh in during the Q&A saying that, you know,
01:15there are arguments on both sides when you consider both sides of the mandate and they have
01:20one tool, one lever, which they can pull. And I wonder, you know, how you see that balance right
01:26now when it comes to inflation, but also the trajectory of this labor market.
01:31Well, I think he characterized it very accurately. Inflation is definitely much higher than the target
01:38and hasn't been moving in the right direction. So those people that are concerned about the inflation
01:43part of the mandate have a very credible argument. But I would say also on the employment side, one of the
01:49reasons this is difficult is because the unemployment rate has been gradually rising.
01:55The chair highlighted the payroll employment, given some adjustments, seemed quite weak.
02:01And as a result, he thought a little bit more insurance was appropriate.
02:05So I think people could easily disagree with the findings of the FOMC this meeting.
02:13And I think it's shown actually in both the dissents, but also a number of presidents who were not voting
02:21members indicated they didn't think that it was necessary to cut rates this meeting.
02:26So there were six participants in the FOMC who said that they thought under appropriate policy, we didn't need to cut.
02:34So presumably that was the two presidents that dissented and then four other presidents who agreed but didn't have a vote.
02:42It doesn't matter at all, Eric, this idea of Jay Powell being a lame duck, not my words, but we've seen this phrase battered around.
02:51And the idea that that could affect the next three meetings in 2026 before we actually get a changing of the guard in May.
02:58I think the current chair is going to do exactly what he thinks is appropriate policy until he's no longer chair.
03:06So I don't think he's a lame duck in that respect.
03:10But I do think he highlighted that he wanted to hand over an economy that whoever the new chair is felt comfortable with.
03:20I do think that it's going to be a more difficult committee to manage for the next chair than the current chair.
03:28One aspect of this particular Fed decision that jumped out at me was the resumption of the Treasury bill buying.
03:35And I know that's kind of a separate sort of a function, if you will, than what they're doing with rates itself.
03:40But I am curious as to what it says about the ending or the curtailing of quantitative tightening to begin with and whether it was appropriate to effectively tamp that down when they did or whether they should have let it keep going.
03:54Well, I think what they're indicating and so, first of all, this is a technical adjustment.
04:01I wouldn't view it as a policy change to start purchasing Treasury bills, which expands the balance sheet.
04:08I think what they're saying is that the Fed funds rate was trading fairly high, which meant that reserves are currently a little bit more restrictive than what they would like to see.
04:20And so, as the economy grows, they need to grow reserves, and they don't think that the balance sheet has room to shrink further without disrupting short-term credit markets.
04:30And I do want to talk a little bit more about the direction of travel when it comes to 2026, because you take a look in the new dot plot in terms of the median projections.
04:39It seems like we're looking at one rate cut for the totality of 2026, one in 2027.
04:45Of course, we know things can shift around, and they often do.
04:48But do you think at this point where we are when it comes to the mandate, when it comes to where inflation is, where the labor market might go,
04:56that the possibility of a rate hike should be entered into the conversation, especially when you think about the global central paying picture right now?
05:04I think it's a little early to be calling for any kind of rate hike, but I do think it's a situation where they would need some significant weakening of the labor market to feel like additional easing was necessary.
05:21And I think that you're seeing with only one cut that that is a bit less than what the market was anticipating in the Fed Fund's futures and is probably quite a bit less than what the administration is hoping for.
05:36Going back to just the state of the economy, Eric, and as this market really tries to get a handle on whether the market needs more rate cuts or maybe just potentially leaving rates where they are,
05:47Jay Powell kind of alluded to the lapse of economic data over the last few months and the idea that there's going to be a big catch up, some big revisions as well.
05:55But the net effect of it, at least in his words, seemed to suggest that the labor market might actually be weaker than at least what we know now based on the data.
06:04If that does indeed prove to be the case, how quickly or more importantly, what tools does the Fed have to address that in an efficient way?
06:15Well, the main way that the Fed has to respond to a much weaker economy would be to lower interest rates much more than they currently anticipate.
06:23So the median rate cut was for only one cut.
06:28If we really start to see the unemployment rise quite quickly, which I don't think is anticipated by the committee, and I don't anticipate it either,
06:37then the appropriate response is to try to lower interest rates enough that it takes care of demand.
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