Instant Reaction: Fed Stands Pat; Lisa Cook & Beth Hammack Dissent

Priya Misra · J.P. Morgan Asset Management

Fed has already hiked and will likely hike more; markets are comfortable, not seeing it as behind the curve.

Misra separates the policy decision from its communication. The market reaction after the decision did not suggest the Fed is behind the curve on inflation. The Fed has hiked and is likely to hike again, so she reads the market as comfortable with the policy itself. The communication was a hard-to-deliver hawkish hold that left the decision unexplained. She adds that markets still price three more hikes, more than the most hawkish Fed official has signalled, which she treats as a sign that the policy path is not yet settled.

“I don't think the market was saying that the Fed's behind the curve on inflation. They've hiked. They're likely to hike some more. I think the market was okay with policy.”at 8:27

Mike McKee · Bloomberg

Warsh's communication is vague and one more CPI won't clarify what the Fed intends.

McKee argues the chair wants to change Fed communication but has not found a way, which leaves Wall Street with a vague picture of what the Fed is thinking. He says the Fed is waiting to look out the window, but there is only one more CPI before December, and oil prices are rising while the war continues, so little will be learned. He also doubts whether the market can price futures without knowing which meetings will produce nothing, since the frequency change could make it unclear which meeting to skip. The result is that the question of where the Fed intends to intervene, and why, went unanswered.

“He wants to change the communication style, but he doesn't know how, and he's leaving people with a vague impression of what the Fed is thinking, and it's not helping anybody on Wall Street figure out what to do.”at 17:13

Jeff Rosenberg · BlackRock

Fed is watching financial conditions tied to the AI trade; steepening hints at a dovish response.

Rosenberg says the chair opened with financial conditions, saying they were tightening without calling them tight, and linked this to AI. In the Q&A, the Fed's rate sensitivity shifted from oil to the AI trade, and the chair said he pays attention to that. He reads the steepening of the curve as a dovish hint, since the Fed will be focused on whether it is overtightening financial conditions if rates move this much. He also argues the transmission is through financial conditions and the wealth effect, because consumption now depends on asset prices and debt, unlike the 1950s manufacturing economy. That makes the Fed far more rate-sensitive via financial conditions than in its history.

“He talked about the rollover and the correlation between oil and interest rates. ... What happened was that the rates stopped looking at oil, and they started looking at the AI trade. And he paid attention to that.”at 20:03

Priya Misra · J.P. Morgan Asset Management

If AI trade deflates, financial conditions tighten and the market, not the Fed, does the work.

Misra argues monetary policy works through financial conditions. The chair said financial conditions had tightened and that this was roughly what the Fed expected, which she reads as pushback against the idea that the AI trade is not rate-sensitive. Her mechanism: if air comes out of the AI trade, rates might fall but financial conditions would still tighten, so markets would do the Fed's tightening work. That makes the AI trade a live input into how much the Fed needs to move, and she thinks this is part of why the Fed is buying time.

“If the air is coming out of the AI trade, interest rates might come down but financial conditions might tighten and then the market's doing the work for the Fed.”at 10:51

Priya Misra · J.P. Morgan Asset Management

Inflation is still a supply shock; conventional theory says look through it, but Fed is in risk management.

Misra's view is that the current inflation impulse is still a supply shock. Under conventional economic theory, a central bank would look through a supply shock. She reads the Fed's stance as risk management: it fears the shock will spread into broader prices. She also says the Fed was divided, with questions about whether it should have hiked in September, and she is not sure which way the committee will go. This makes the supply-versus-demand question the key to whether the Fed looks through or responds.

“But I'll go back to we think this is still a supply shock. There were questions on whether they should have hiked in September. If this is a supply shock, normal conventional economic theory would say look through it. I think this was risk management.”at 15:53

Jeff Rosenberg · BlackRock

AI is a macro event; if it falters, the shock would be primarily disinflationary.

Rosenberg argues the market this month recognised that AI is a macro event as much as a micro one. AI supports growth through consumption and through investment, so if the AI trade is undermined the resulting shock would be primarily disinflationary. He links this to the Fed's sensitivity: the chair noticed AI-linked markets and tightening financial conditions, which shows he understands how important AI is to growth. This makes AI a driver of the rate path, not only a sector story.

“what we saw this month was the market sort of sniffing out that AI is a macro event as much as it is a micro event. And if there is a[n] undermining of it, it's going to be a macro event that is primarily disinflationary.”at 21:33