The Fed kept rates steady and indicated that they were on hold but data dependent. Many investors thought the reduction in QT was dovish, but it is simply a technical issue that results in a simpler Fed balance sheet without huge reverse repo or repo balances. However, Fed Chair Powell did recognize that inflation readings driven by higher tariffs should be ignored when setting monetary policy as the increase is one time, not ongoing, and the tax increase from tariffs is recessionary and deflationary in the long run.
Most investors do not distinguish between political inflation (or populist inflation) and economic inflation. Political inflation includes all price increases including egg price increases, tariff related increases and short-term increases in gasoline prices. Economic inflation is ongoing increases in inflation caused by excessive money supply growth. The Fed should of course focus on economic inflation as raising rates will not lower egg prices, gasoline prices or reduce price increases from higher tariffs. This dynamic explains why the dot plot indicated higher inflation but the same number of rate cuts.
We continue to forecast that the Fed will be forced to lower rates at least 3 times this year as the recession in the old economy in response to ultra tight monetary supply continues to reduce economic growth. The Fed’s current policy is highly deflationary/recessionary as it has had to shrink the money supply by over 5% Y/Y vs. a normal growth rate of 4-6%. We forecast the 10-year rate will decline to 3.75% by the end of the year as Fed cuts are implemented.
We continue to believe that the Fed’s current policy framework is dangerous as its inflation target is clearly too low and the price index it follows is lagged by two years. In addition, the framework should include guidelines for unemployment and money supply growth. It is very clear that the President has the power to fire the Fed Chair for past incompetence including precipitating the Great Inflation of ’21 but cannot remove the Fed Chair due to current policy disagreements. The President should consider firing Chair Powell in order to avoid a recession and to install a Chair that will reform the Fed’s policy framework.