Federal Reserve puts on enormous party hat

Katie Martin (0:09)

A great moment in history has arrived. Rob Armstrong was right about something. Quite against the run of play, shush, Rob, quite against the run of play, the Federal Reserve has cut interest rates, hooray, from the highest level in decades, and for the first time since the pandemic. And what's more, it went large, cutting by half a point, precisely as my esteemed colleague had predicted. Now, what kind of boo-doo is this? Does the Fed know something horrible we don't? Cutting by half a point is normally a crisis measure, a cry for help. Should we panic about a recession? And really, Rob was right, end times. Today on the show, we're going to explain how come investors are ignoring the usual script and taking this bumper cut as a good thing.

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London. And listeners, I must tell you, the saddest of things has happened. I am joined by Rob Armstrong, Lord of the Unhedged newsletter, but the sad thing is he's dialing in from his sickbed. Rob, I'm sorry you're poorly.

Rob Armstrong (1:23)

I am poorly. It's terrible. But on a 50 basis point day, the dead shall rise from their graves. The angels shall sing. And we're all gonna talk about it.

Katie Martin (1:35)

Yeah, it's got strong Barry White vibes I'm getting from this voice you're busting out today. So as you say, half a percentage point from the Fed, that's 50 basis points in market money. Normally central banks love being super boring and they normally move by quarter point increments. So, I mean, was it the shock of being right about the 50 basis point thing that pushed you over the edge into sickness?

Rob Armstrong (2:01)

It could have been.

I'm so accustomed to getting this wrong now that it was really paralyzing. However, I think, you know, you mentioned earlier, why is the market kind of taking this in stride and seeing this is a good thing? And I think it's a bit of a communication success by the Fed in that they told the story about this, that they're not doing this because they have to, because it's an emergency. They're doing it because they can. And the reason they can is because they've kind of beaten inflation. Right?

Katie Martin (2:32)

So for people who, unlike us, have a life and don't sit around watching Central Bank press conferences, the way this works is they do the decision, they say, here you are, here's your 25, your 50, whatever basis points of it on hold. This time around, it was 50 basis points. And then just a little while later, there's a press conference where the chairman, Jay Powell, gets up in front of all of the most pointy-headed Fed journalists in the world and fields whatever questions. There's a statement, and then he fields whatever questions they want to throw at him. And this, for him, was the point of highest danger, because the risk of giving the impression somehow that we're really worried, that's why we've done 50, that was a serious risk, right? But instead, what happened?

Rob Armstrong (3:16)

Well, right from the press release, announcing the 50 basis cut, they tweaked the language in the press release, so that it was more affirmative and strong on the topic of inflation. We're really pleased how it's going on inflation. And then in the press release, I mean, in the press conference, he just reinforced that point again and again. The line he repeated was, the labor market is fine, it's healthy, it is at a good level, we don't need it to get any better, we're not trying to improve it, but we have the freedom to make sure it stays as good as it is. And that message seems to have gone through. Markets didn't move yesterday afternoon, and as a very opening minutes of trading this morning, stocks are up. So that message seems to have gotten through.

Katie Martin (4:07)

Yeah, that is skills, actually. I will hand it to them, because we've said this before on this podcast, like it's so easy to like throw stones and peanuts at the Fed or the European Central Bank, Bank of England or whatever, and say, they messed this up. But like, this stuff is hard, getting the markets to come away with that sort of impression is not to be taken for granted.

Rob Armstrong (4:31)

It's not to be taken for granted, I agree. However, I will note, anytime you're trying to spin a narrative and you want people to believe it, one thing that really helps is if the narrative is true. And in this case, I think it broadly is. I think inflation really does look like it's whipped. It's really either at or very close to 2%.