The Fed: Dissecting the "Fed Put"

How the Fed is using its "tools" to keep growth elevated and employment full while reducing inflation.

Programming Note

I started writing this note pre-market on April 4 before losing power for 24 hours starting at 10am EST. As such, none of it has anything to do with financial market price action the last two trading days.

Discussion

FED Chair Jerome Powell made a very subtle, yet critically important tweak to his press conference opening statement at the November 2023 FOMC, saying:

Reducing inflation is likely to require a period of below-potential growth and some softening of labor market conditions.

The opening statement the meeting before said “below-trend”. THAT was the pivot - not the rate cut guidance that led the market to price in more than 6 rate cuts in 2024. And THAT is why the equity market has continued to rally despite the market going from more than 6 cuts to less than 3 cuts.

Powell has since elaborated on what THAT entails from a policy perspective, and it is incredibly powerful and I believe continues to be misunderstood. I only recently fully grasped its power, but once I did it allowed me to completely adjust my mindset.

The Fed Put

I am a FED nerd and listen to Powell’s press conferences multiple times, so it’s easy for me to pick up on even subtle changes changes in both his written and off-the-cuff statements. I picked up on the “below-potential” immediately. And one would think that I would have immediately adjusted my thinking and positioning. But of course not - I remained ensconced in the notion the Fed was pleased with circa 500 bps UST 10s and 30s as a way to keep and maintain tight enough policy in place to bring inflation back down to 2% without further hikes to Fed Funds. I started to get it at the December press conference, but it was until Powell’s March testimony to Congress that I started to grasp what was going on.