The Fed’s Pause Raises Questions

The Federal Reserve’s meeting this week was straightforward, and the big question is why.

The Fed did not hike, and there were two dissents. The only substantive change to their statement was an upgrade of underlying growth from “solid” to “strong.” The rest reiterated the resilience of the economy and acknowledgement of ongoing elevated inflation.  

Yet, I believe most people would interpret the inflation picture not only as bleak, but likely to worsen as elevated commodity inflation bleeds into final goods prices paid by the public.  

So, it’s puzzling that the Fed took no action, and, in their own words, focused on accumulating more information. For some time, I have shared my belief that this is a “different Fed.”  For now, I appear to be wrong, as we got more of the same: acknowledgement of today’s problems with a reluctance to do anything about them.  

Even forward guidance, a practice Chair Kevin Warsh had talked about dissolving, remained alive and well since the prior meeting. Despite data suggesting a hike was needed, markets had all but dismissed the possibility after numerous influential Fed members all but guided the market toward the Fed’s inaction this week.  

However, I believe Warsh’s comments signify the Fed sees 2% inflation as 2.0% and below, as somewhere in the 2s would not suffice to meet their 2% inflation price stability target. Yet, while the Fed is indicating 2% is a ceiling, the market has treated it as a floor. This has the potential to be highly consequential if the Fed delivers on this promise.

We also learned the Fed will continue to have eight meetings next year, but only seven of them will be “live” from a policy setting perspective. In 2028, eight meetings, with six of them live.  Still, it’s possible that these meetings, while not delivering a rate move, may deliver something far more consequential for markets, a defining shift in future Fed policy.  

As the country faces the likelihood of a lame duck president with a Democratic House and possible Democratic Senate, the last thing we need is a lame duck Fed. With only five months on the job, and another 3.5 years to go, I refuse to abandon hope for Warsh’s tenure. Instead, I continue to hope that indeed this Fed is different, just not yet.

With the next Fed meeting scheduled roughly one month out, the shock and awe may yet return.  If elevated inflation persists, the picture may be even clearer than it is today: a hike is not only prudent, but necessary.  Perhaps we will get a 50-basis-point hike to make up for lost time.

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