I attended an economic symposium yesterday where the speaker was an economist for the Federal Reserve. Admittedly, and somewhat embarrassingly, I was a little starstruck. I was fascinated to see this guy elaborate on the data that I geek out over every day. He talked really fast and I ate it all up—plus the brownies they served were extra delicious
Although it most likely wasn’t the central point of the speaker’s message, in my mind he clearly laid out evidence illustrating that since the pandemic we have seen a structural shift in the way the markets interpret data. The result has been an unnerving decorrelation between headlines and market reaction.
Mr. Economist went on to show that although the FOMC present a unified body in their policy statements, there is more divergent thinking than ever about the correct course of action to fulfill the Two Great Commandments of monetary policy, which are, in my words not his:
- Thou shalt ensure that those who want work have it.
- Thou shalt protect the power of the dollar
The incoming Fed Chair is predisposed to lower overnight interest rates, which is a great headline. However, he also is of the opinion that the Federal Reserve should begin the process to liquidate the majority of its $7 trillion in assets. There are several really good reasons to do this, namely, to deleverage the economic power of the Federal Reserve. In theory, I think I’m for that. Unfortunately, flooding the market with a considerable amount of the current portfolio will water down the current supply of bonds and cause prices to plummet, thereby raising long-term interest rates. Since I am a peddler of those long-term securities, I’m not the biggest fan of higher mortgage rates.
Now here’s. another unnerving factoid. We are increasingly questioning the integrity of incoming data, particularly from federal institutions. Since late 2024, the published headlines have been optimistic, but proven dead wrong when subsequently recalculated. So rather than algorithmically quantifying what the incoming datasets mean, policy makers are merely fishing for patterns among the varying streams of information. Consequently, forecasting the future has become more difficult than ever before. And perhaps that challenge is what draws people to fish in the first place. Some days you’re reeling them in and some days you’re completely skunked. Which is why rather than fishing, I mostly frequent events where they serve brownies.
