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

Priya Misra · J.P. Morgan Asset Management

The Fed's policy was sound; the communication failed to explain the hawkish hold.

Misra separates policy from communication. The market reaction showed no sign the Fed is behind the curve on inflation, and the Fed has already hiked and is likely to hike more. She says the market was comfortable with the policy, but the chair did not explain the decision, did not discuss the data or inflation breadth, and left open whether the Fed is removing risk-management cuts, adding hikes, or recalibrating the neutral rate. She reads the Fed's stance as risk management against a supply shock spreading into the economy, and says the market is still pricing three hikes.

“There's a policy and then there's the communication. The policy you saw the market reaction right after. 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 8:41

Mike McKee · Bloomberg

Waiting for more data gives little clarity; only one CPI before December and oil is rising.

McKee argues the Fed's plan to look out the window will not resolve much. Only one more CPI print comes before the December meeting, and PCE is already known. With oil prices rising and the war still going on, he does not expect the Fed to learn much from waiting. He says the chair did not say where the Fed needs to intervene or why, and that the question of whether the economy has moved from a supply shock to a demand shock went unanswered.

“They want more time to look out the window. What are they gonna see out the window? There is one more CPI between this meeting and the December meeting... I don't think you're gonna learn a whole lot by looking out the window.”at 17:39

Jeff Rosenberg · BlackRock

The Fed is watching financial conditions and AI-driven rate sensitivity; the steepening is a dovish hint.

Rosenberg says the most important takeaway was the chair's focus on financial conditions. The chair said conditions had tightened and linked this to AI, and Rosenberg says rates stopped tracking oil and began tracking the AI trade. Rosenberg takes the curve steepening as a dovish hint, since the Fed will be focused on whether it is overtightening financial conditions if rates react this strongly to an increase. He also argues the transmission mechanism now runs through financial conditions and the wealth effect on consumption.

“...a little bit of the steepening of the curve that you see there in the market, I think that's a little bit of a dovish hint because they're gonna be really focused on whether they're overly tightening financial conditions if there is indeed this much of a reaction to an increase in interest rates.”at 19:23

Priya Misra · J.P. Morgan Asset Management

An AI trade sell-off would tighten financial conditions, so markets would do the Fed's work.

Misra argues the Fed is watching financial conditions because the AI trade matters to them. If the AI trade deflates, interest rates might fall, but financial conditions could still tighten. That would let the market tighten policy on the Fed's behalf, which would reduce the Fed's urgency to act. She reads the chair as explicit that the AI trade is interest-rate sensitive, pushing back on the idea that it is not.

“It's not just the labor market and inflation, it's going to be financial conditions. If the air is coming out of the AI trade, interest rates might come down but financial conditions might tighten and then the markets doing the work for the Fed.”at 11:00

Jeff Rosenberg · BlackRock

AI is a macro event; its undermining would be primarily disinflationary, supporting consumption and investment.

Rosenberg argues the market recognised that AI is a macro event as much as a micro one. The Fed chair's remarks show he understands how central the AI driver is to growth, since AI supports consumption through the wealth effect and supports investment. If AI were undermined, the resulting macro shock would be primarily disinflationary, because the lost consumption and investment would weigh on demand. That is why the rate sensitivity to AI matters.

“...the market sort of sniffing out that AI is a macro event as much as it is a micro event. And if there is [an] undermining of it, it's going to be a macro event that is primarily disinflationary.”at 21:45