FED Watch: H4L Rates Policy
Analysis of FED Vice Chair Jefferson's decisive reiteration of H4L rates policy.
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Discussion
As discussed yesterday, when a member of the “Troika” (Chair, Vice Chair, FRB NY President) speaks, you listen. FRB NY President John Williams spoke yesterday in a clear attempt to soothe jittery markets at a time of geopolitical and interest rate uncertainty (i.e. the ‘stocks’ portion of “H4L Rates and Stocks” policy stance). Today it was Vice Chair Philip Jefferson’s turn, this time to reiterate the ‘rates’ portion.
In his speech Jefferson walks through the historical record of how the Fed has dealt with uncertainty when setting the stance of monetary policy, going into detail about two key approaches - “Bayesian” and “ambiguity aversion” - and mentioning a third: “robust control”. I see three key takeaways from this speech:
The bar to backing off H4L rate policy was set extremely high.
The so-called “real rate policy” that Governor Waller espoused during the pivot period last November-December has been tossed aside.
A long-term meeting-by-meeting framework is now in place.
It’s becoming a bit redundant to say that the Fed will not cut rates this year, but the groundwork is very obviously being laid for this outcome yet there is still a reasonable amount of rate cut wood left to chop farther out the OIS curve, which still has the January 2025 Fed Funds just above 480. I continue to maintain the thesis that the current “no landing” economic outcome underway in 2024 will result in the Fed restarting rate hikes at the December 2024 FOMC meeting, ultimately bringing Fed Funds up to around 583 by the January/February 2025 FOMC meeting on its way to over 600 by mid-2025.
Now on to the third member of the Troika, Chair Powell, currently speaking on a panel in DC.
Full Speech
(My highlights in yellow and red.)