The first hike since 2023
The Fed delivered a 25bps rate hike today. The hike was widely expected by market participants with implied probability of a 25bps hike today sitting at more than 90%. So really the hike today was not much of a surprise.
What was not given was the guidance and how would the Fed think about the rate trajectory going forward. My bet going into the meeting was that it was more likely to be a dovish leaning hike, meaning that the Fed and Warsh were to signal one hike and then pause to reassess, effectively framing the hike as a precautionary hike.
However, the Fed and Warsh were more resolute than I and perhaps many participants anticipated on getting inflation down to the 2% PCE goal.
The first notable fact was that the decision to hike was unanimous. The second was that the SEP released with this meeting which includes the dot plot for rate projection, shows the median forecast of 1 additional 25bps by end of year. Notably, Warsh himself once again refrained from giving a dot plot estimate, staying true to his pledge of not in the business of forward guidance. Also notable was how many times Warsh mentioned price stability and how much shorter today’s press conference was- usually the press conference runs until 2:15 central time, but today it ended around 2pm.
After the hike and the statement, and during the press conference, there was a relatively broad sell-off in equities and in gold and cryptos as well. Treasuries also dropped following the hike with a curve flattening- the short end yields rose on the day while the long end yield actually dropped slightly. Dollar strengthened.
After the press conference, the White House spokesperson said that the decision to hike was rather unfortunate. Trump himself also posted on Truth Social in capital letters that rates need to come down.
To me, I think this is the right decision from the Fed’s and Warsh’s standpoint, and it is generally helpful for the long end treasuries, precisely because it is restoring a good amount of faith and confidence in the system and in the Fed and in Warsh himself, that at least someone is still exercising some kind of restraint.
In a sense, this move is not purely economic, as the a good chunk of the inflation is driven by supply crunch due to rising oil and diesel and fertilizer and etc. prices, and hiking rates can only do so much for supply disruptions. Not to mention that another piece of the puzzle is the AI capex which seems less interest rate sensitive for now. I’d argue the move is more political, in the sense that his and the Fed’s and even the system’s reputation and credibility is on the line. If he signals weakness it might be much worse as confidence erodes further.
The question is now what? Is the Fed alone able to shore up enough confidence of the system, without true fiscal restraint or downright austerity? And what about the interest payments on the national debt that is a growing share of the budget? What about the tremendous defense budgets that are needed to fund the war in Iran and replenish stockpiles? What about the SPR refill? What about the $5000 Trump rebate? My money is on that it’s not going to be enough.
And, let’s not forget that the AI related spending is, in my opinion, what has been propping up the economy and the market until now. We have heard calls for a slowdown of frontier research due to safety concerns by industry leaders like Amodei, Altman and Musk, while others like Huang, Zuckerberg and Trump himself have said otherwise and that we can’t afford to slowdown.
One can’t help but think about why they talk about a slowdown now, and why OpenAI is talking about delaying IPO and planning to raise more money. A potential reason is that they want to slow down their capex, and it makes sense that Huang and Trump is against it, because the spending cannot slow down for the thing to keep going.
The question here is, what happens if the slowdown really happens, or if the monetization is not going organically as expected, if we end up realizing that an LLM is not really AGI and that we need to rethink how to make this work? Will the Fed be as responsive and swiftly turning as they did today (or really during the Jackson Hole)?
The Ephemeral Tourist 