The Fed: Back to Basics

While the path for the economy and S&P 500 is unclear, an analysis of ‘first principles’ suggests the ultimate destination of Fed policy, and therefore the economy and S&P 500, is quite clear.

Discussion

On Friday January 20, in the last Fed appearance before the Fed’s self-induced official blackout period ahead of the January 31-February 1 FOMC meeting, Governor Christopher Waller had the following to say in response to a question about what he would need to see to start cutting interest rates:

“If the market’s view of inflation comes true - this very rapid disinflation - that’s great news. I’m happy for that. My concern is that we have to guard against in six months it looks great, then something takes off. Then we would have to raising rates again if we were thinking about starting to cut. That’s a thing we can’t do. So, this risk management idea where we have to guard against the upside risk of inflation jumping up ties us to staying higher for longer than the market would typically want you to do. So, that’s the best explanation I can say.”

Max hawkish right? Validation of The WOTE¹ thesis that the Fed is laser-focused on avoiding the Burns Fed “stop and go” policy error of the 1970s, right? Not so fast. Waller immediately followed up with: