Rate drop, market drop

Rob Armstrong (0:06)

Pushkin. Grateful Dead fan and also chairman of the Federal Reserve, Jerome Powell, had a press conference, made an announcement, and the market didn't like it one bit. Stocks fell, bonds rose, the dollar rose. People were not happy. Today on the show, what did the Fed do right or wrong that made markets rumble? This is Unhedged, the Markets and Finance Podcast from the Financial Times in Pushkin. We are coming to you from the Christmas Decoration Covered headquarters of Unhedged in beautiful New York City.

Aiden Reiter (0:48)

I'm currently draped in tinsel.

Rob Armstrong (0:49)

Draped, we are covered in tinsel. I am wearing an elf outfit. And I am joined by my reliable and brilliant lieutenant, Aiden Reiter.

Aiden Reiter (1:01)

I thought you were going to say helper elf.

Rob Armstrong (1:03)

Helper elf, exactly. Aiden, what did he say? What happened?

Aiden Reiter (1:10)

So they cut the rate by 25 basis points.

Rob Armstrong (1:13)

Which is exactly what everyone was perfectly certain they were going to do. So that can't be the problem.

Aiden Reiter (1:18)

That's not the problem. Although there are questions about whether or not they should have done that. But we'll come back to that.

Rob Armstrong (1:23)

Okay.

Aiden Reiter (1:24)

What he did was change the manner in which he was speaking about next year.

Rob Armstrong (1:29)

Yes.

Aiden Reiter (1:30)

And then they also put out a summary of economic projections, which is a quarterly thing that comes out with the Fed.

Rob Armstrong (1:35)

Yes.

Aiden Reiter (1:36)

And it showed a meaningful change from the last summary of economic predictions. Yeah.

Rob Armstrong (1:40)

We should pause there and just give listeners a kind of mental image. So at every Fed meeting, there is a news release which says, here's what we've done with the interest rate. And it also has a lot of verbs and adjectives in there that people parse very carefully.

Aiden Reiter (1:56)

A lot of good writing.

Rob Armstrong (1:57)

And there's always a press conference. And at some meetings, they have this thing known in Wall Street jargon as the SEP, the Statement of Economic Projections. And the SEP has various charts, graphs and diagrams.

Aiden Reiter (2:10)

It's just like a pocket of charts.

Rob Armstrong (2:12)

And it says, here's what we expect inflation, growth, unemployment and the policy rate to be this year, next year, the year after that, and in the long term.

Aiden Reiter (2:22)

And this is the famous dot plots, right? You might have heard people say dot plots. Essentially, it's just showing you the range of where different Fed members have voted on each number, right?

Rob Armstrong (2:32)

Of where policy ought to be.

Aiden Reiter (2:33)

Where policy ought to be, exactly. So that's the dot plot.

Rob Armstrong (2:36)

So this is very much worried over and fussed over, and pictures are compared.

Aiden Reiter (2:41)

And this was notable because it was the first SEP since Trump was elected, right? The last one is in September.

Rob Armstrong (2:47)

Okay.

Aiden Reiter (2:47)

And what has changed from this SEP is first in September, they said by the end of 2025, we expect there to be a full percent drop in the current policy rate.

Rob Armstrong (2:58)

Yes. Which should get us into like the threes somewhere by the end of next year.

Aiden Reiter (3:03)

The low threes. They changed that. They said it's actually only going to be half a percentage point, so 50 basis points.

Rob Armstrong (3:09)

It's a big difference.

Aiden Reiter (3:10)

It's a huge difference. So we're going to be in the high threes.

Rob Armstrong (3:12)

Okay.

Aiden Reiter (3:13)

Or even the low fours.

Rob Armstrong (3:15)

Policy, we expect. Now that's not making policy. They're not saying what's going to actually happen. They're saying what we expect now is somewhat tighter policy.

Aiden Reiter (3:25)

Yeah, tighter policy.

Rob Armstrong (3:26)

That probably by itself would be enough to cause a little tremor in markets.

Aiden Reiter (3:31)

But it was more about how it was delivered, right? So of course, every journalist, including our very own Colby Smith, asked the chairman, do people do this because they're concerned about Trump's policies? Why are we changing our projection? And he gave kind of a wavering answer. On the one hand, he was like, no, absolutely not. But also some people said that they did do it because of this.

Rob Armstrong (3:53)

I think it's worth pausing just to say his exact words here because they're interesting. So somebody asks, is this because you think Trump is going to impose tariffs and tariffs are inflationary or generally Trump policy is inflationary? And he says, this is not a question that's in front of us right now. We don't know when we will face that question. What the committee is doing right now is discussing pathways and understanding the ways in which tariffs can drive inflation in the economy. So he says, no, that's not happened. But then a few seconds later, he said something quite different. Some people, this is Jay Po talking, some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policy into their forecast at the meeting and said so in the meeting. Some people said they didn't say so and some people didn't say whether they did or not. And that is the crucial sentence of the whole meeting. He said, some people on the committee who set your national interest rates have looked at the Trump policy set and are changing their projections for what growth, inflation and rate policy are going to be. This is a big deal and it almost, not quite, but almost contradicts the other thing that he said, which is, we don't have to think about this yet.