John Ryding is crystal clear about the message sent by the minute of the Federal Reserve’s September meeting where it cut its key rate by another 25 bps: it doesn’t make sense. “The key message is that they’re inclined to cut interest rates…the logic that would power that rate cut is a bit contorted.”
John’s assessment is the product of many years of experience, starting as an economic advisor to the Bank of England and then as a senior economist at the Federal Reserve Bank of New York, moving on to several years sizing up the Fed as the chief economist at Bear Stearns, and now as the founder and chief economist of RDQ Economics and as the chief Economic Advisor to Brean Capital. In other words, this is not his first Fed watching rodeo.
So why is he saying this at a time when many Fed officials and other Wall Street economists think the Fed is on the right track?
”Now I think if you look at the Fed’s forecast numbers, if you look at the language, the inflation rate is further away from target and likely potentially to stay further away from target than the unemployment rate is, which is only a tenth of a point above where the Fed thinks full employment,” he notes. “And yet the Fed is cutting interest rates. The case for stimulus simply is not made here.”
”Things on the inflation front haven’t gotten worse but they have’t gotten better and at the same time you have the economy close to full employment but it might get worse,” John adds. “And so they’re somehow trying to say…the relative balance of risks has changed, even though the absolute balance of risk might be tilted towards inflation.”
”It’s just…to me, the story doesn’t hang together.”
So dive in and hear what John has to say about all of this - not only what’s happening now but what the results of this could be if the Fed stays on this path. And what he thinks about market reactions thus far. Spoiler altert: he’s watching gold very closely.
The Fed will ease and it fails to make its case for easing 00:01:59.240
Well… The key message is that they’re inclined to cut interest rates. the logic… that would power that rate cut is a bit contorted, I think. And, you know, that’s the… that’s the issue here, because They said, for example, the risks to higher inflation and lower employment were… roughly balanced <risks>. They also noted that inflation was Above target, and likely to go higher before it goes lower. And yet… And in inflation, they said that the unemployment rate is close to where they think full unemployment is. So, the Fed has a problem. They have one instrument, Monetary policy, and two targets.: maximum employment and price stability.
And you can go back to the work of the first noblest in economics, Jan Thinbergen, who said you have to have as many independent, policy instruments as you have targets. So the Fed has one instrument and two targets. And so… they have… they’re in a really difficult situation. And so they’ve said, how are we going to handle this? We’re going to look at which variable is furthest away from target, And how long…Now, I think if you look at the Fed’s forecast numbers, if you look at the language. The inflation rate is further away from target, and likely potentially to stay further away from target than the unemployment rate, which is only a tenth of a point above where the Fed thinks full employment is. And yet… the Fed is cutting interest rates. The case for stimulus simply Is not made here.
No Inflation progress is just fine 00:03:54.980
But they say, well, Things on the inflation front haven’t gotten worse, some haven’t gotten better. And at the same time. Let’s talk about… hings on the inflation front haven’t gotten worse, but they haven’t gotten any better. And at the same time…
Close to full employment & overheated…So?? 00:04:17.
The economy pretty much close to full employment, but it might get worse. And so, they’re somehow trying to say, well, the relative balance of risks have changed, even though the absolute balance of risk might still be tilted towards inflation. It’s… it’s just… Really, to me, the story doesn’t hang together.
Members, participants and the Board staff <economists> 00:04:58.770
So the meeting starts off with presentations on the markets, on open market operations, on the economy, and then the board staff for the Professional economists who are projecting the outlook. Using their large macro models, using judgment, using other things. And then you go on to a discussion where the participants, who are the members of the Board of Governors, the 12 regional Fed Presidents, and they talk about the economic outlook, talks about inflation, talks about unemployment, talks about growth. And then, they talk about their views on policy, the here and now, and going forward. But then, when it comes to the decision.
The decision comes down to the members. The members of the committee are a subset of those 19 participants, which is the members of the Board of Governors, and the New York Fed President, and four rotating regional bank presidents. And so… In the end. The participants may well influence through arguments the views of the members, but it’s the members who make the decision, but in reality. There’s one member, that’s Jay Powell.
Fed is not like the BOE-Did the Administration make this cut? 00:08:31.370
But the Fed is not like the Bank of England, where the Bank of England in the past has made a decision on a split vote, one vote, making a difference, and the Governor of the Bank of England, the equivalent of the Fed chair.He’s been on the wrong side, the losing side of the vote. But the Fed doesn’t work like that. The Fed works by consensus building, And…you often see the language that the Fed Chair uses in the press conference then being adopted in subsequent speeches by, other committee.
But… If we go back to the previous meeting, before September, go back to the July meeting. there wasn’t really much of a hint to Fed that was thinking about Cutting rates in September. And the chair, although the markets were pricing it in. The chair part really opened the door to that at the Kansas City Fed’s Jackson Hole conference. Where he basically… That a rate cut was on the table. And then the market’s, like, completely, completely locked it in. So the Fed… The question is. Why do we believe this contorted explanation, or is this an attempt to dress up, a rate cut that really was pushed by. the executive branch of the government?
Is it outrageous to suggest that or logical and open-minded? 00:10:16.360
It’s a question, but it’s a question, because if you look at the logic, if you look at… when the Feds task to… Maintain price stability, which they’ve interpreted as a 2% inflation target. And the task to maintain maximum employment. And unemployment is just 1 tenth of a point above where you think full employment is. And inflation hasn’t been at your target in the last 5 years, and it’s still nearly a percentage point away from target. And we still have the effects of tariffs coming through, which many members of the committee appear to think is going to push inflation up, at least in the short term. Question is, why is the Fed cutting at all?
Shifting risks… 00:11:03.950
And so, the Fed created this logic of, we’re trying to address a shifting balance of risks And yet… A greater risk, right now. would appear to be to inflation, and the Fed sort of says that this kind of balance, but… but there’s no doubt about it that the labor market is driving the interest rate policy. And…there’s… there’s a problem with that, because if you… why is the… why has job creation slowed? And then now we get into real subtle into the land market iring, Is it very low rates. But firing is at very low rates, and in a weak economy with insufficient demand. People normally get laid off. That is not happening. It’s seen in jobless claims data. So, we have a… we have policy that’s trying to push people out of the country. And if you look at what, for example, Governor Miran has said, it’s a million to a million and a half people have left the U.S. That’s… that’s maybe close to 100,000 workers Per month, on average, have… have left the U.S. So, if you don’t have the people to hire.
And so, job creation slows, but the unemployment remains low. What is an interest rate cut going to achieve? If it stimulates demand in an environment where inflation is a problem, and there’s a shortage of labor. It’s going to achieve higher inflation without doing very much, if anything to address the problem, potential problem of unemployment.
Signs of excess are being ignored 00:13:37.850
…Then when you talk about financial market conditions, look where we were today. Gold prices went above $4,000 an ounce for the first time. Gold prices were up 50% over the last year. Now, I’ve been a… long-time believer from my days of Bear Stearns. But when you get big moves in… alternative money, and I’m not talking about crypto, Bitcoin, or anything, I’m talking about, like, you know, the gold, which historically was one of the first, if not the first, like, real money that… was created, talking… You know, back in enrollment times, week times. If you’re seeing these big price moves that investors are saying, hey, wait a minute, I’d rather own some of this shiny stuff. Gold and silver. Rather than… paper money. then you’re… You have the market signaling maybe there’s too much paper money around. Maybe the value of that money is going to be eroded. And these are pretty big moves, and they should give the Fed You look at equity prices, too. You know, We’re basically at record levels. These are not the kind of things that are normally associated with tight money.
Productivity and AI emerge as issues 00:15:22.220:
Now, there’s a very important disconnect between the strength of GDP growth and the strength of job creation. The difference between the two is productivity. So we are getting, it would appear, finally climbing out of the various sluggish productivity growth we had in the last decade. So that’s… that is disruptive at this point, and there are a number of studies that have suggested, and people are more talking about it just in the last few weeks, about the role that AI is having in competing with Entrance to the labor force. Now, AI has to be embodied in capital, has to be embodied… it’s why companies like NVIDIA work so much, because they produce the hardware that AI runs on. So, if you, you have… this article, with the embodied AI, potentially. Keeping new entrants out of the lead flips. That’s a problem.
But it’s not a problem, and I asked Governor Bowman this question, just a couple of weeks ago. It’s not a problem… And I… it pointed out, and we’ve written about it before. If you can’t get new entrants into the labor force, because they’re competing with capital, and the capital is cheaper and more efficient. Lowering interest rates, which lowers the cost of capital, help to get those workers into labor force. You need training programs. You need other branches of government, not monetary policy.
So, going back to where I started, monetary policy is tasked with two things. Maintaining stable prices. And maintaining maximum employment. and… Those things pull in different directions, but if monetary policy is not well-suited To deal with the kind of problem we may have on the labor market side. But making monetary policy easy, we know from 2021 and 2022, the COVID experience, that when monetary policy is too easy, in the current environment we’re in. You get inflation
Never-ending Fed “Insurance Purchases”- 00:17:30.400
Why… why are we cutting? And I’ll also point out, the Fed took interest rates down by a percentage point between September and December of last year. Precisely to buy insurance against a potential problem in the labor market. So the insurance has already been purchased, and now the Fed is buying more insurance when the inflation numbers are beginning to go in the wrong direction.
The message from the gold market and history 00:19:55.330
It could be that gold bugs are naturally… maybe this is segmented universe of investors, and gold bugs are naturally more… Sensitive and cautious and suspicious about monetary policy and inflation. Problem is that relationship sort of disappeared for a while. And… but it’s clearly a vote of no-confidence in the dollar, in my opinion. And so, if you’re… It’s the value of the dollar Over the last year, as it has, has fallen by one-third against gold, or alternatively, gold’s gone up by one-half relative to the dollar. And gold doesn’t pay interest. This is a huge statement by the markets. And it’s a much bigger statement than, say. whether the inflation break-even in the TIPS markets moved by 10 basis points. This is a massive statement.
And so, it will… it will… it may be just simply a sign there’s too much liquidity out there. Too much liquidity out there, it’s still fueling the stock market, potentially. it’s fueling Gold prices, people are trying to buy things of… more enduring value, that would be the argument. Why are bond yields not reactive? Well, it’s pretty hard to do so. When the Fed is pushing interest rates down. The Fed has cut over the last year, by 1.25%. And so… That kind of environment has prevent… may, in the short term, prevent bond yields from going up too much.
It’s not about logic or monetary policy its interest on the debt 00:22:33.370
Well, they all want to see lower interest rates, and it may be that one of the reasons they want to see them is because of the mushrooming fiscal debt. They want to get the interest costs of the debt down. But… It’s not the job of the Fed. To use monetary policy. to manage the interest on the debt. It just… it just is… and if we do the way that Monetary policy in… Historical regimes As influence of debt, and inflating the debt. away. Is it caused inflation. So, I think that that may be one of the sources of pressure. The administration’s seeking lower interest rates.
New Fed policy…Divided we stand? Inflation expectations rise 00:24:10.560
Well, we have a divided committee, and we have the inflation expectations that have been rising. Medium-term inflation expect… has come up about 4 tenths of a point over the last 3 months to 3%. The University of Michigan’s Which soared to above 4%, on the tariffs. in position on Liberation Day on April 2nd, then came down, and then went back up again. That’s at 3.7%. So the inflation expectations of households are elevated, and the Fed is still making a little bit of a pretense that those inflation expectations are anchored. But if they are anchored, they’re hanging on by a threat, because we haven’t had inflation close to target. In the last 5 years. So you get people saying, well, maybe the Fed’s really not… targeting 2%, maybe they’re looking to target 3%. I don’t believe that’s the case, but the Fed isn’t really doing a very good job of convincing people that’s the case by virtue of the fact that that conversation is happening.
Going back to the distinction between participants and members, it seems to me that… Raphael Bostic, presence at the Atlanta said. very, very strong research department on inflation at the Atlanta Fed. He doesn’t want to see rates go lower this year. He was one and done, we had the one, that’s it. And there was a language today that a few which is Fed language for… 3 or 4… Maybe 5. participants, you know, could have, you know, would have been comfortable withholding rates unchanged. Now, nobody dissented against cutting rates at all. Steve Moran’s assented for a steeper cut. Nobody dissented against cutting rates. So the members… Those five regional feds that did have a vote. voted to… voted to cut rates. But in the broader committee. There seems to be some resistance to cutting rates further, but here’s the problem. The Fed tells us it’s data-dependent of what don’t we have anymore? <DATA!>
LIGHTS OUT!! data, but decisions to make 00:26:27.340
We have no data. So now, you have a Fed that is supposedly data-dependent, That is slain blind. going into the September… sorry, going into the October 29th meeting. So what… if this shutdown continues that long, and we don’t get the data. on jobs and inflation, what is the Fed going to look at to justify its next rate cut? Because, after all. If we were to get a surge in hiring, it doesn’t look like we’re going to get from the private sector data sources, from ADP, for example, but if we were to get a surge in hiring. In the government data, the unemployment rate were to drop, or it turns to… because, you know, it’s possible that the break-even rate of job creation to keep the unemployment rate steady is negative in the current environment towards immigrant labor. what would be the basis for a further rate cut?
So this is a real dilemma, because now the Fed just simply doesn’t have its data. It has more private sector employment data. Then, private sector, inflation data. And, it’s beginning to look quite possible the Fed will go into the meeting without any further inflation data. Now, that may be inflation data that would have been uncomfortable for the Fed. We may have had more tariffs passes. Yeah But, we have a Fed that will have basically no more information on the economy. on October 29th than it had back at the last meeting in September when it cut rates. And if that’s the case. And the Feds didn’t want to cut rates by 50 basis points at the last meeting, based on the evidence that it had. Why would it want to cut another 25 with no more information? I will say, Chair Powell once used an analogy. When you walk into a room that’s unfamiliar and the lights go out, what do you do? Move slowly, you feel, you find, try and figure out where the furniture is. Now, in this case, the lights literally have gone out for the government.
John Ryding is Chief Economist of RDQ Economics LLC, an independent economic research and consulting firm. Mr. Ryding is also the Chief Economic Advisor to Brean Capital LLC, a New York-based full-service broker-dealer. Before he founded RDQ Economics, he was the chief U.S. economist at Bear Stearns and Co. He started his career in 1980 at the economics department of the Bank of England, where he held various positions, including the head of the Economic Forecasting Group. He was also a senior Federal Reserve Bank of New York economist from 1989 to 1991. He has been selected to represent the views of financial research economists on macroeconomic issues. He has expertise in U.S. economic and monetary policy and economic forecasting. Mr. Ryding is a graduate of Cambridge University in England.
