James E. Thorne

Ignore the noise. Iran War gets resolved, yields fall, risk assets appreciate.

The Fed’s Next Mistake, Dressed Up as Prudence

Expect the Fed’s defenders to provide intellectual air cover for a December hike: concede that the overnight rate cannot fix an oil shock, then insist on hiking anyway. The contradiction will go unexplained.

Main Street and the cyclical economy outside AI will absorb the damage.
Hiking into a supply shock does not produce more energy. It suppresses demand elsewhere and decides who pays. Calling that “prudence” does not make it sound economics.

Recall that the Fed cut 50 basis points in September 2024, ahead of a presidential election. Today, it is entertaining a 50-basis-point hike.

That is the contrast its defenders need to explain. Then, an aggressive move was a prudent recalibration.

Now, an aggressive move in the opposite direction is supposedly the same thing. “Prudence” has become whatever the Fed happens to propose. That is not a coherent reaction function. It is institutional deference masquerading as analysis.

Waller’s speech was reckless.

Yet, Wall Street’s applause was predictable. Apparently, questioning the Fed’s reasoning is less fashionable than rationalizing its next mistake. To be clear, Wall St analysts are lap dogs for the Fed.

As the energy shock dissipates, the justification will migrate to whichever price category still looks uncomfortable. Intracity transportation, perhaps. Find a stubborn component, ignore the broader cycle, and declare the case for tightening established.

This is not analysis. It is a conclusion shopping for evidence!! Read the Wall St justifications for hikes it’s comical, find the compotent with historical outside moves and say “see the Fed needs to hike 50bps”

To adapt the line commonly attributed to Lavrentiy Beria, Stalin’s secret-police chief: “Show me a component with a one-time historic price spike, and I’ll find you a justification for a rate hike.”

The Fed needs to leave the 1970s behind. An economy divided between an AI investment boom and interest-sensitive businesses under pressure cannot be understood through a single, mechanically applied estimate of r*. Different sectors face different financing conditions and respond differently to the same policy rate. That is not an obscure theoretical qualification. It is the economy the Fed is supposed to understand.

The cyclical case is for a cut, not another hike. The Fed’s acolytes will call further tightening a defence of credibility. Credibility is not restored by repeating a policy error with greater conviction.

The Fed Is Fighting the Wrong Inflation. Warsh needs to show leadership!

Warsh wants to scrap forward guidance and dot plots while leaving Fed officials free to broadcast their policy preferences. That does not end forward guidance. It hands the microphone to hawks and disgruntled colleagues, allowing their pronouncements to shape expectations.

Reckless comments from Fed officials need to stop!

The result is neither coherent communication nor disciplined policymaking. A central bank should distinguish a fading supply shock from persistent demand pressure, not let its loudest voices dictate the response.

October’s CPI rose 0.4 per cent, down from 0.6 per cent, the trend matters. Core was 0.3% unchanged from previous month.

Governor Waller is floating a half-point December increase. A tenth above expectations, and out comes the sledgehammer. That’s reckless!!

Yet services accounted for nearly 90 per cent of core inflation, with shelter contributing half of core services. Owners’ equivalent rent, an estimate, not a payment homeowners make, dominated shelter rent.

Housing scarcity is not a wage-price spiral. Higher rates can aggravate it by raising construction costs and locking homeowners into existing mortgages. The supposed cure risks feeding the disease.

Meanwhile, the energy shock is unwinding. West Texas crude has fallen more than 20 per cent from late October; wholesale gasoline is down 27 per cent since September. One-year inflation swaps are below 2 per cent.

Six-month annualised core CPI is 2.7 per cent; Dallas trimmed-mean PCE is 2.4 per cent. Third-quarter productivity rose 3.6 per cent annualised, while unit labour costs fell 0.7 per cent.

These figures demand judgment, not reflexive tightening. Raising rates into easing energy prices and falling labour costs would risk turning a temporary inflation shock into recession.

Warsh wants to scrap forward guidance and dot plots, yet Fed officials remain free to signal their own policy preferences under the existing communications rules. He is effectively ceding forward guidance to the hawks and disgruntled colleagues. That is no way to run the Fed.

Please forward to the Fed.

Inflation swaps. 👇