The Fed on The Lombard Review

The Fed hikes, and its chair skips the dot plot

Fri, 18 Sep 2026 14:58:00 -0400

In a historic and unprecedented policy gathering on 18 September, the Federal Open Market Committee officially raised the benchmark federal funds rate by 25 basis points to 3.75–4.00 per cent. Far more shocking to Wall Street trading desks, however, was an extraordinary administrative omission: Chairman Kevin Warsh pointedly declined to submit his own interest rate projection in the quarterly Summary of Economic Projections dot plot.

The Missing Chair Dot as a Signal

In the history of the Federal Reserve’s Summary of Economic Projections, the Chairman has never withheld their personal policy projection. Warsh’s deliberate omission delivered an unmistakable, aggressive signal: the Chairman views the dot plot as a misleading, pseudo-scientific exercise that improperly constrains central bank flexibility. By withholding his dot, Warsh un-tethered himself from forward guidance commitments, preserving total operational discretion to tighten policy further.

The rate hike the Fed can't avoid

Tue, 15 Sep 2026 12:05:00 -0400

The yield on the benchmark 10-year US Treasury climbed to 4.954 per cent on 11 September, as an exceptionally weak Treasury debt buyback operation confirmed that institutional bond liquidity is deteriorating under the weight of unyielding inflation persistence. The Federal Reserve now faces an interest rate hike that it can no longer avoid.

The Liquidity Warning in Debt Buybacks

The Treasury Department’s regular debt buyback operations are designed to inject liquidity into off-the-run sovereign debt. When institutional primary dealers submit exceptionally weak offers and refuse to tender paper at reasonable spreads, it signals that dealer balance sheets are clogged with inventory and unwilling to take on duration risk. The sovereign bond market is actively demanding higher benchmark policy rates to anchor inflation expectations.

Labor Day: Hiring is strong enough to worry the Fed

Mon, 07 Sep 2026 16:35:00 -0400

As the nation celebrated Labor Day, the American labor market delivered an unvarnished message of economic vitality that sent a wave of acute anxiety through the Federal Reserve: the blowout August employment report confirmed that domestic hiring is far too strong for the central bank’s comfort.

The Threat of Full Employment

In standard political discourse, robust employment growth is celebrated as an unalloyed national triumph. In the sterile, technocratic corridors of the Federal Reserve, however, an economy adding hundreds of thousands of jobs alongside 3.4 per cent inflation represents an imminent monetary hazard. Strong hiring sustains consumer purchasing power, enabling households to absorb hundred-dollar oil and retail tariffs without cutting consumption, fueling persistent demand-pull price pressures.

Blowout jobs, tighter Fed

Fri, 04 Sep 2026 11:24:00 -0400

The August employment report arrived with an explosive, unequivocal display of macroeconomic resilience: non-farm payrolls surged far above all Wall Street expectations, delivering a blowout hiring print that obliterated any remaining arguments for central bank accommodation.

The Taylor Rule Divergence

Quantitative monetary models—including standard Taylor Rule specifications and inertial policy-reaction functions—indicate that with headline inflation at 3.4 per cent and labor markets operating at full employment, the rule-implied federal funds rate sits well north of 4.50 per cent. The prevailing policy rate of 3.50–3.75 per cent represents an un-sustainable, overly accommodative monetary stance that actively fuels domestic demand overheating.

Warsh speaks, bonds sell

Tue, 25 Aug 2026 13:49:00 -0400

Federal Reserve Chairman Kevin Warsh delivered his first major public address since taking office, speaking at an institutional monetary policy conference on 25 August. His uncompromising, hawkish remarks sent an immediate tremor through global fixed-income markets: benchmark 10-year Treasury yields surged higher across the trading session.

The Warsh Doctrine Codified

Warsh’s speech dismantled any residual hope of central bank accommodation. The Chairman stated unequivocally that price stability is the non-negotiable prerequisite for sustainable economic prosperity, declaring that the Federal Reserve will not hesitate to raise policy rates and aggressively shrink its asset portfolio to crush persistent inflation expectations. Warsh pointedly rejected the argument that the central bank should 'look through' supply-side energy and tariff shocks.

The market bets on a Warsh hike

Fri, 21 Aug 2026 15:48:00 -0400

Short-term interest rate futures and sovereign yield curves underwent a dramatic, hawkish realignment on 21 August: financial markets have decisively shifted from pricing Federal Reserve rate cuts to pricing an imminent benchmark rate hike under Chairman Kevin Warsh. The two-year Treasury yield surged to approximately 4.24 per cent.

The Forward Curve Capitulation

The hawkish repricing represents the complete surrender of Wall Street’s easing thesis. With two-year yields trading well above the prevailing 3.50–3.75 per cent policy rate corridor, interest rate swaps are pricing an overwhelming probability that the Federal Open Market Committee will officially raise the federal funds rate by 25 basis points at its upcoming September policy meeting.

Three Fed officials want a hike

Tue, 04 Aug 2026 10:39:00 -0400

The official voting record of the Federal Open Market Committee’s 29 July meeting revealed an unmistakable, historic hawkish shift: the committee voted 9–3 to hold benchmark interest rates steady, with three dissenting members demanding an immediate 25-basis-point rate increase. In central banking history, a triple dissent for higher rates is the definitive precursor to an official policy hike.

The Minority as the Forward Indicator

FOMC history demonstrates that when three voting members formally break with the consensus to advocate for policy tightening, the committee’s center of gravity has shifted irrevocably. The dissenting members cited surging second-round energy inflation, persistent unit labor costs, and resilient consumer spending as clear proof that the current 3.50–3.75 per cent policy rate is insufficient to contain inflation expectations.

The Fed's hawks start to multiply

Fri, 26 Jun 2026 15:05:00 -0400

The Federal Open Market Committee concluded its June policy gathering by keeping the federal funds rate pinned at 3.50–3.75 per cent. However, behind the facade of a steady policy rate, the internal balance of power within the central bank underwent a violent hawkish revolution: dissenting votes in favor of an immediate rate hike multiplied across the boardroom.

The Hawkish Dissent Wave

With headline consumer price inflation re-accelerating under the weight of hundred-dollar crude, lingering import tariffs, and persistent service wage growth, the committee’s hawkish faction launched an open rebellion. Multiple regional Fed presidents argued passionately that keeping policy rates paused while inflation expectations drift higher represents an unconscionable abandonment of the central bank's statutory price stability mandate.

What does Warsh want?

Fri, 15 May 2026 09:23:00 -0400

With Jerome Powell’s term as Federal Reserve Chairman formally expiring in mid-May, global financial markets have turned their collective analytical firepower upon incoming Chairman Kevin Warsh. For quantitative modeling desks and sovereign bond traders, the transition represents the most profound structural break in central bank leadership since Paul Volcker took office in 1979.

The Warsh Reaction Function

Kevin Warsh’s academic writings and monetary speeches outline an aggressive, unorthodox policy doctrine. Warsh views the Federal Reserve’s $6.5 trillion balance sheet not as a benign liquidity facility, but as a dangerous instrument of fiscal dominance that distorts asset prices, misallocates capital, and subsidizes unconstrained congressional deficits. His core strategic objective is clear: execute an aggressive, accelerated contraction of central bank assets in exchange for delivering benchmark policy rate reductions.

Powell's final meeting

Tue, 28 Apr 2026 15:47:00 -0400

Federal Reserve Chairman Jerome Powell presided over his final Federal Open Market Committee meeting on 28 April, marking the conclusion of a historic, turbulent eight-year tenure spanning pandemic emergencies, historic inflation spikes, and aggressive trade wars. Yet the transition to his designated successor, Kevin Warsh, injects profound institutional risk into sovereign debt markets.

The End of the Powell Era

Powell leaves a central bank that successfully navigated the most violent inflation episode in forty years without causing a catastrophic balance-sheet depression. However, his departure leaves the FOMC deeply fractured, with policy rates paused at 3.50–3.75 per cent amidst sticky core services inflation and an unconstrained Middle East energy crisis. Powell’s disciplined, consensus-driven leadership is about to give way to an untested, ideologically aggressive regime.

The Fed faces a war shock

Fri, 20 Mar 2026 12:25:00 -0400

The Federal Open Market Committee concluded its March policy meeting by freezing the federal funds rate at 3.50–3.75 per cent, trapped in a classic central bank nightmare: confronting an exogenous geopolitical supply shock that crushes economic output while simultaneously detonating headline inflation.

The Supply-Shock Reaction Function

Central bank dogma suggests that monetary authorities should look through temporary supply-side energy shocks, avoiding rate hikes that compound economic slowdowns. However, with headline CPI already threatened by hundred-dollar oil and core services inflation sticky, the Fed cannot afford the luxury of accommodation. Cutting rates to support growth risks un-anchoring long-term inflation expectations; hiking rates to fight oil prices guarantees a severe domestic recession.

The dollar's Warsh moment

Tue, 10 Feb 2026 11:34:00 -0500

The US Dollar Index staged an explosive, violent single-day rally following the formal nomination of Kevin Warsh as Federal Reserve Chairman, delivering what currency trading desks instantly dubbed 'the dollar's Warsh moment.'

Pricing the Liquidity Contraction

The sudden surge in the dollar reflects foreign exchange markets pricing the monetary implications of the Warsh doctrine. If an incoming Warsh-led Federal Reserve executes an aggressive, accelerated contraction of its multi-trillion-dollar balance sheet, the supply of global dollar reserves will shrink dramatically. A shrinking Fed balance sheet drains international liquidity, driving up the cross-currency scarcity value of the greenback.

Who is Kevin Warsh?

Tue, 03 Feb 2026 10:46:00 -0500

The White House stunned financial markets on 30 January by officially nominating former Federal Reserve Governor Kevin Warsh to succeed Jerome Powell as Chairman of the Federal Reserve. The nomination triggered an immediate reassessment of the central bank’s future balance-sheet and interest-rate trajectory.

The Warsh Doctrine: The Great Balance-Sheet Compromise

Kevin Warsh’s economic philosophy represents a unique synthesis of monetary conservatism and supply-side pragmatism. A long-time critic of post-crisis quantitative easing and balance-sheet bloat, Warsh has consistently argued that massive central bank asset portfolios distort asset prices, crowd out private capital, and facilitate fiscal profligacy. In monetary circles, the core expectation is an explicit institutional trade: aggressive shrinking of the Fed's $6.5 trillion balance sheet in exchange for lower benchmark policy rates.

One speech that flipped the Fed odds

Fri, 28 Nov 2025 16:37:00 -0500

Financial markets underwent a violent, instantaneous recalibration in Federal Reserve policy expectations on 21 November, triggered entirely by a single, meticulously structured address delivered by New York Fed President John Williams. The probability of a December 25-basis-point interest rate cut leaped from a coin-flip 50 per cent to over 85 per cent within sixty minutes.

The Voice of the Core Leadership

In the Federal Reserve’s communication hierarchy, the President of the New York Federal Reserve—who serves as Vice Chairman of the FOMC and permanent voting member—speaks as the direct operational proxy for Chairman Powell. Williams emphasized that with the federal government shutdown resolved and labor market indicators showing structural softening, maintaining an overly restrictive policy stance posed an asymmetric threat to employment stability.

The Fed stops shrinking its balance sheet

Fri, 31 Oct 2025 15:03:00 -0400

At its October policy meeting, the Federal Open Market Committee delivered a widely expected 25-basis-point interest rate cut, lowering the benchmark federal funds target to 3.75–4.00 per cent. Far more significant, however, was the official announcement that quantitative tightening (QT) will definitively terminate on 1 December.

The Surrender to Money Market Reality

The decision to end balance-sheet runoff marks the central bank’s capitulation to funding market mechanics. With SOFR trading above IORB and repo spreads widening under the weight of massive Treasury bill issuance, the Fed had exhausted its reserve cushion. Central bank staff recognized that continuing to roll off $25 billion in Treasuries and mortgage-backed securities risked triggering a catastrophic liquidity seizure in money markets.

A shutdown would leave the Fed flying blind

Tue, 30 Sep 2025 09:35:00 -0400

As Capitol Hill hurtled toward an October 1 funding deadline with no legislative compromise in sight, the Federal Reserve braced for an operational disaster: a federal government shutdown that would immediately freeze the collection and publication of official economic data, leaving monetary policymakers flying completely blind.

The Statistical Blackout Mechanism

During a federal funding lapse, the Bureau of Labor Statistics, the Census Bureau, and the Bureau of Economic Analysis are legally prohibited from functioning. Field survey collection ceases, data processing servers are shuttered, and scheduled releases—including the crucial September non-farm payrolls and consumer price reports—are indefinitely postponed. Central bankers navigating a critical policy easing cycle are stripped of their primary econometric instruments.

The Fed cuts, cautiously

Fri, 19 Sep 2025 13:48:00 -0400

The Federal Open Market Committee officially initiated its monetary easing campaign, lowering the target federal funds rate by 25 basis points to a range of 4.00 to 4.25 per cent. The policy statement emphasized that the move was an 'insurance easing' designed to support a softening labor market, but the decision was marred by a contentious 50-basis-point dissenting vote.

The Dissent as a Forward Indicator

The formal dissent in favor of a larger half-point reduction highlights the mounting anxiety within the committee regarding the rapid deceleration in employment growth. Slower hiring and massive benchmark downward revisions have convinced dovish members that monetary policy is operating far behind the economic curve. However, Chairman Powell managed to secure a cautious quarter-point consensus by pointing to lingering tariff cost pressures.

Trump's man joins the Fed

Tue, 16 Sep 2025 09:55:00 -0400

Stephen Miran, a vocal economic nationalist and former senior Treasury official, was formally confirmed by the Senate to fill a vacant seat on the Federal Reserve Board of Governors on 15 September. The confirmation marks a significant ideological breach in the central bank’s historically non-partisan governing body.

The Shift in Institutional Reaction Function

Miran’s arrival brings an explicit pro-tariff, supply-side monetary doctrine into the heart of the Federal Open Market Committee. Unlike traditional central bankers who view tariffs as stagflationary cost-push shocks requiring restrictive monetary offsets, Miran has argued that central banks should accommodate trade-related relative price shifts by providing lower policy rates and targeted liquidity to domestic manufacturing.

Trump moves to fire a Fed governor

Tue, 26 Aug 2025 11:45:00 -0400

The White House ignited an unprecedented constitutional and financial crisis on 25 August by initiating legal proceedings to dismiss Federal Reserve Governor Lisa Cook prior to the statutory expiration of her term. The unprecedented attempt to remove a seated central bank governor for policy disagreements triggered immediate turmoil across sovereign debt markets.

The Threat to Statutory Central Bank Independence

Under the Federal Reserve Act, governors may only be removed by the President 'for cause'—traditionally interpreted as explicit malfeasance or severe incapacitation, not dissenting economic ideology. Challenging this statutory protection strikes directly at the institutional core of central bank independence. If a sitting executive can dismiss governors who vote against administrative rate preferences, monetary policy becomes subordinate to electoral cycles.

Powell opens the door to cuts

Fri, 22 Aug 2025 14:34:00 -0400

Federal Reserve Chairman Jerome Powell delivered a decisive monetary pivot during his annual address at the Jackson Hole Economic Symposium, formally signaling that the central bank is preparing to initiate benchmark interest rate reductions. Confronted with a cooling labor market, Powell stated unequivocally that downside risks to employment now outweigh upside risks to inflation.

The Shift in the Reaction Function

Powell’s remarks mark the official conclusion of the Fed’s inflation-obsessed policy posture. With non-farm payroll growth decelerating sharply and cumulative revisions erasing hundreds of thousands of jobs, the central bank’s dual mandate has rebalanced. Powell acknowledged that while tariff-related cost pressures remain an operational risk, monetary policy cannot afford to remain overly restrictive while domestic labor demand actively softens.

A divided Fed

Fri, 27 Jun 2025 12:20:00 -0400

The Federal Open Market Committee's June Summary of Economic Projections revealed an unprecedented, deeply fractured policy consensus. While the headline median dot continued to project two quarter-point rate reductions before year-end, a forensic review of the distribution revealed a stark bimodal divergence: seven of the nineteen committee members projected zero rate cuts for the remainder of 2025.

The Institutional Bimodality

The Federal Reserve has fractured into two irreconcilable intellectual camps. On one side, the institutional leadership views softening labor demand, slower real GDP growth, and rising trade frictions as clear signals to recalibrate policy toward neutral before a recession takes hold. On the other side, a determined hawkish faction points to sticky core services inflation, looming tariff price pass-through, and persistent fiscal deficits as definitive evidence that policy must remain restrictive.

The Fed quietly stops shrinking its bond pile

Tue, 25 Mar 2025 09:14:00 -0400

With minimal fanfare, the Federal Reserve executed a pivotal operational pivot in its quantitative tightening (QT) program. The central bank announced that effective April, the monthly redemption cap for maturing US Treasury securities would be dramatically slashed from $25 billion to just $5 billion per month, effectively halting the systematic runoff of sovereign debt from its balance sheet.

Reserves Scarcity and Repo Stability

The central bank’s decision was dictated by plumbing stress inside short-term money markets rather than macroeconomic posturing. As the Treasury General Account fluctuates and reverse repurchase facility balances approach practical operational minimums, bank reserves held at the Fed have drifted toward the threshold of structural scarcity. Memory of the September 2019 repo market seizure compelled central bank staff to act proactively before funding friction broke out in overnight secured borrowing rates.

The Fed sees slower growth and higher prices

Fri, 21 Mar 2025 16:46:00 -0400

The Federal Open Market Committee’s updated Summary of Economic Projections delivered a sobering reality check to market participants hoping for a smooth economic landing. Central bank policymakers officially downgraded their 2025 GDP growth forecast to 1.7 per cent while simultaneously elevating their core personal consumption expenditures (PCE) inflation expectation to 2.8 per cent: the classic econometric signature of stagflationary friction.

The Stagflationary Conundrum

When economic growth decelerates while underlying price pressures accelerate, standard central bank reaction functions become paralyzed. Lowering interest rates to support softening labor markets risks entrenching above-target inflation expectations. Conversely, holding benchmark policy rates restrictive to crush lingering price momentum threatens to transform a mild economic slowdown into a severe balance-sheet contraction.

Christmas: A lump of coal from the Fed

Wed, 25 Dec 2024 13:59:00 -0500

For financial markets hoping for an extended season of monetary goodwill, the Federal Reserve’s December policy package felt distinctly like a lump of coal in the stocking. By accompanying its interest rate cut with an aggressive upward revision to future policy projections, the central bank signaled that the era of painless easing has ended.

The Grinch at the Eccles Building

The committee’s caution is well-founded: with equity multiples near record highs, credit spreads at historical tights, and universal import tariffs looming, further easing would pour kerosene on speculative animal spirits. By anchoring the terminal policy rate near four per cent, the Fed has warned investors that borrowing costs will remain restrictive for years to come. The holiday rally must stand on its own earnings feet.

The Fed cuts, then takes back half of next year's cuts

Tue, 24 Dec 2024 09:10:00 -0500

The Federal Reserve concluded 2024 with a calculated monetary retreat. While delivering a widely anticipated 25-basis-point rate cut that lowered the benchmark rate to 4.25–4.50 per cent, the updated dot plot delivered a hawkish shock, slashing projected rate cuts for 2025 in half—from four down to just two.

Pricing the Protectionist Regime

The FOMC explicitly adjusted its baseline forecasts to reflect higher growth, sticky core inflation, and prospective tariff shocks under the incoming administration. By signaling that the easing cycle will halt far above four per cent, Jerome Powell officially ended the aggressive monetary pivot narrative. The sovereign yield curve reacted with an aggressive bear steepening as rate cuts were priced out.

The Fed is about to cut, and sound tough doing it

Tue, 17 Dec 2024 15:16:00 -0500

The Federal Reserve enters its December policy meeting trapped in an intricate communication dilemma. While the committee is widely expected to deliver a 25-basis-point interest rate cut to satisfy market expectations, policymakers are desperate to prevent financial conditions from loosening further ahead of incoming tariff shocks.

The Hawkish Easing Paradox

Jerome Powell’s strategy will be to deliver the rate reduction while brandishing an aggressively hawkish Summary of Economic Projections. By slashing projected rate cuts for 2025 and raising its long-run terminal rate dot, the Fed will attempt to signal that the easing cycle is pausing indefinitely. Delivering a rate cut while simultaneously warning markets not to expect more is a perilous rhetorical balancing act.

How low will the Fed go?

Fri, 15 Nov 2024 14:53:00 -0500

The Federal Reserve delivered a measured 25-basis-point interest rate cut on 7 November, lowering the federal funds rate to 4.50–4.75 per cent. Yet fixed-income analysts are scrutinizing where the easing cycle will ultimately terminate. With the incoming administration promising tariffs, tax cuts, and deficit expansion, the terminal rate is drifting higher.

The Elusive Terminal Boundary

If fiscal stimulus and protectionism re-ignite inflation pressures in 2025, the neutral rate of interest (r*) will sit significantly higher than central bankers projected in their September dots. Fixed-income markets have begun pricing in an early halt to the easing cycle, projecting that the Fed may pause rate cuts once the policy rate approaches four per cent. The runway for monetary easing is rapidly narrowing.

Halloween: The Fed cut, and yields went up

Thu, 31 Oct 2024 14:47:00 -0400

On Halloween, bond investors were confronted with a genuine fixed-income horror show. Exactly six weeks after the Federal Reserve initiated its monetary easing cycle with an aggressive 50-basis-point rate cut, the benchmark ten-year US Treasury yield touched 4.28 per cent—an astonishing 66-basis-point increase since the easing was announced.

The Post-Cut Duration Nightmare

Historically, central bank rate cuts trigger lower bond yields and easing financial conditions across the sovereign curve. This time, the easing triggered the opposite: a ferocious steepening of the curve powered by resilient economic growth, rising inflation expectations, and election deficit anxieties. Investors who purchased duration to capture a rate-cutting windfall have been thoroughly haunted by bond market reality.

Banks' interest income bottoms out

Fri, 11 Oct 2024 12:39:00 -0400

Third-quarter earnings from America’s premier commercial banks revealed that the margin windfall from restrictive interest rates is finally decelerating. While JPMorgan Chase raised its full-year net interest income guidance to $92.5 billion, executive commentary highlighted that the cyclical peak in deposit earnings has passed as the Fed begins easing.

The Margin Squeeze of Easing

As benchmark base rates decline, asset yields reset lower almost immediately across floating-rate commercial loans and credit lines, while retail deposit costs decline at a significantly slower pace. The resulting net interest margin compression will test bank profitability over the coming year. Premier balance sheets will remain highly profitable, but the era of effortless margin expansion is over.

The Fed cut rates. Why are mortgage rates rising?

Tue, 08 Oct 2024 13:25:00 -0400

In one of the most counterintuitive market moves of recent years, the Federal Reserve’s jumbo 50-basis-point interest rate cut was immediately followed by a sharp surge in long-term borrowing costs. The benchmark ten-year Treasury yield climbed from 3.62 per cent to over 4.0 per cent, driving thirty-year fixed mortgage rates back toward seven per cent.

The Term Premium Revolt

Homebuyers and equity investors expecting immediate financing relief were left bewildered. The explanation lies in term structure dynamics: by cutting rates into economic resilience, the Fed ignited inflation expectations and fueled the 'higher nominal growth' thesis. Long-term bondholders demanded higher yields to compensate for prospective inflation and relentless federal debt supply. Monetary easing at the front end steepened the curve.

The Fed goes big

Fri, 20 Sep 2024 13:19:00 -0400

Jerome Powell chose institutional boldness over gradualism at the September FOMC meeting, delivering an oversized 50-basis-point interest rate cut that lowered the benchmark rate to 4.75–5.00 per cent. The decision shattered a two-decade precedent of launching easing cycles with standard quarter-point increments in the absence of an immediate market panic.

The Front-Loaded Insurance Cut

The move was not unanimous, drawing the first dissenting vote from a Federal Reserve governor since 2005, as Michelle Bowman favored a measured 25-basis-point step. Yet Powell made it clear that the Fed is determined to prevent further deterioration in the labor market. By recalibrating policy aggressively upfront, the committee hopes to engineer a durable soft landing while preserving its disinflationary gains.

The Fed now sees just one cut

Fri, 14 Jun 2024 16:23:00 -0400

The Federal Open Market Committee delivered a cold bath of realism to interest rate optimists at its June gathering. While keeping the benchmark rate unchanged at 5.25–5.50 per cent, the updated dot plot slashed projected 2024 rate cuts from three down to a single solitary quarter-point move. Even a benign May consumer price index print was insufficient to soften the committee's collective resolve.

The Hawkish Median Trap

A granular look at the projections shows eight of nineteen officials projecting just one cut, while four saw zero easing this year. The Fed is determined not to repeat its premature pivot rhetoric of late 2023. With economic activity remaining superficially sturdy and financial conditions loose, the committee is demanding sustained, multi-month statistical proof before easing policy.

How far can Europe cut before the Fed does?

Fri, 31 May 2024 12:11:00 -0400

The European Central Bank is preparing to cross a monetary Rubicon. With inflation across the eurozone cooling toward 2.4 per cent and economic activity remaining moribund, Christine Lagarde has signaled an impending June rate cut. In doing so, Frankfurt will deliver monetary easing well ahead of the Federal Reserve.

The Transatlantic Policy Divergence

Historically, the ECB rarely embarks on a prolonged easing cycle without the Federal Reserve leading the way. Cutting policy rates while the Fed remains on hold widens transatlantic interest rate differentials, putting downward pressure on the euro. A weaker single currency inflates the cost of imported commodities and energy, threatening to import inflation back into the European economy.

The Fed slows its balance-sheet shrinking

Tue, 07 May 2024 11:03:00 -0400

At its May policy meeting, the Federal Reserve delivered an important structural adjustment to its monetary plumbing by announcing a substantial taper of its quantitative tightening (QT) programme. Starting in June, the monthly cap on maturing US Treasuries allowed to run off without reinvestment will be slashed from $60 billion to $25 billion.

Preserving the Reserve Buffer

By slowing the pace of balance-sheet runoff, Jerome Powell is attempting to avoid a repeat of the September 2019 repo market seizure. With the Overnight Reverse Repo facility rapidly depleting, continuing QT at full throttle would soon drain cash directly from bank reserves. Tapering runoff extends the runway of balance-sheet reduction while minimizing the risk of a catastrophic wholesale funding crunch.

The market gives up on rate cuts

Tue, 23 Apr 2024 14:47:00 -0400

The sovereign bond market has executed a brutal capitulation. Having entered the year pricing in six Federal Reserve rate cuts, fixed-income markets have erased nearly the entire projected easing cycle for 2024. Ten-year Treasury yields have surged to 4.70 per cent, dragging mortgage pricing back toward eight per cent and battering equity multiples.

The Great Erasure

The repricing has been total and unforgiving. Bond allocators who piled into duration in late 2023 on hopes of swift capital appreciation are nursing severe mark-to-market losses. With benchmark base rates remaining cemented above five per cent, the entire sovereign curve has steepened to reflect the reality that monetary policy will remain restrictive for the foreseeable future.

Powell admits cuts will take longer

Tue, 16 Apr 2024 11:32:00 -0400

Jerome Powell completed a significant rhetorical retreat on 16 April, officially acknowledging what bond markets had been pricing for weeks: that persistent inflation will delay prospective interest rate cuts. Speaking in Washington following three consecutive months of hotter-than-expected inflation prints, Powell admitted that it will take 'longer than expected' to gain the confidence needed to ease policy.

Surrendering the Pivot

Powell’s remarks marked the formal dismantling of the aggressive easing narrative initiated at the December FOMC meeting. By affirming that the central bank is prepared to hold benchmark rates at 5.25–5.50 per cent for as long as necessary, the Fed chair effectively aligned institutional guidance with market reality. The dream of a painless summer rate cut has been abandoned.

The Fed nudges its long-run rate higher

Fri, 22 Mar 2024 13:00:00 -0400

The Federal Open Market Committee held its policy rate steady at 5.25–5.50 per cent in March, but quantitative analysts focused intently on a subtle adjustment in the Summary of Economic Projections. The median estimate for the longer-run federal funds rate—the committee's proxy for the nominal neutral rate—ticked upward from 2.5 to 2.6 per cent.

The Creeping Neutral Rate

While a ten-basis-point adjustment appears negligible, within the hyper-conservative consensus of the FOMC it represents a profound intellectual shift. Several members raised their individual dots above three per cent, acknowledging that structural economic momentum, higher productivity, and massive fiscal issuance are lifting the equilibrium rate of interest. The policy rate will not be returning to post-crisis lows.

The Fed's banking lifeline expires

Tue, 12 Mar 2024 11:04:00 -0400

On 11 March, the Federal Reserve officially ceased issuing new loans under the Bank Term Funding Program (BTFP), terminating the emergency lending facility launched during the regional banking panic of 2023. The facility fulfilled its purpose by allowing lenders to pledge underwater securities at par, but its expiration removes a critical balance-sheet safety net.

The Loss of Par Collateral

With the BTFP closed, commercial banks holding underwater Treasury and agency mortgage securities can no longer access par liquidity; they must rely on the discount window, where collateral is subject to market haircuts. While wholesale funding conditions have normalized, regional banks with large unrealized securities losses remain vulnerable to sudden liquidity shocks. The training wheels of central bank balance-sheet protection have been removed.

Banks borrow from the Fed to earn more from the Fed

Tue, 16 Jan 2024 09:20:00 -0500

In the quiet corners of central bank plumbing, a lucrative arbitrage trade has flourished. Following the collapse of Silicon Valley Bank, the Federal Reserve established the Bank Term Funding Program (BTFP) to provide liquidity against par value collateral. By late 2023, an unintended interest rate gap emerged: banks could borrow from the BTFP at roughly 4.9 per cent and immediately deposit the proceeds into the Fed's reserve balance earning 5.4 per cent.

The Fed's money drain is about to get real

Tue, 02 Jan 2024 14:35:00 -0500

The Federal Reserve’s quantitative tightening (QT) programme has operated quietly in the background, absorbing nearly $1 trillion in sovereign and mortgage debt without disrupting financial plumbing. This effortless balance-sheet reduction was made possible by the Fed's Overnight Reverse Repo (ON RRP) facility, which absorbed the liquidity drain as cash departed the RRP rather than commercial bank reserves. That buffer is rapidly vanishing.

The Reserve Drain Frontier

Having plunged from over $2.5 trillion to roughly $700 billion, the RRP facility is on track to empty by mid-year. Once the RRP is exhausted, every dollar of ongoing QT will be extracted directly from commercial bank reserves. When bank reserves begin to shrink toward the 'lowest comfortable level of reserves' (LCLOR), wholesale money market volatility will return, forcing the Fed to slow or halt its balance-sheet runoff.

New Year: Markets want six rate cuts. They'll be disappointed

Mon, 01 Jan 2024 10:24:00 -0500

Wall Street enters 2024 in a state of euphoric anticipation, with forward markets pricing in six quarter-point interest rate reductions beginning as early as March. It is an enticing prospect, but one that sets investors up for profound disappointment. The gap between what financial markets want and what the Federal Reserve’s reaction function will tolerate has rarely been wider.

The Reaction Function Gap

For the Fed to deliver 150 basis points of rate cuts in 2024, the economy would need to experience either a rapid deterioration into recession or an immaculate collapse in service wage inflation. With GDP tracking above potential, unemployment below four per cent, and financial conditions loosening dramatically, aggressive easing would risk reigniting inflation. Central bankers will proceed with deliberate, frustrating caution.

The Fed pivots

Fri, 15 Dec 2023 14:17:00 -0500

Jerome Powell completed his historic rhetorical pivot at the December FOMC meeting, handing financial markets an early holiday gift. In holding the benchmark rate steady at 5.25–5.50 per cent, the committee updated its dot plot to show three rate cuts in 2024, lowering the median year-end projection to 4.6 per cent. Powell explicitly acknowledged that rate cuts are entering discussions as inflation subsides.

Surrendering to the Curve

By actively validating the market’s easing narrative rather than leaning against loosened financial conditions, the Fed signaled that its focus has shifted from inflation risk to protecting economic growth. The pivot ignited a ferocious 'everything rally', driving sovereign yields lower, equity indices to record highs, and credit spreads to historical tights. The central bank has effectively declared the tightening cycle finished.

Can the Fed really cut six times?

Tue, 12 Dec 2023 09:29:00 -0500

Financial markets have fully embraced the fantasy of an immaculate macroeconomic landing. Fed funds futures are aggressively pricing in up to six 25-basis-point rate cuts for 2024, projecting a rapid descent in the policy rate from 5.4 per cent to below 4.0 per cent. Yet examining the Federal Reserve's historical reaction function exposes a glaring logical contradiction.

The Asymmetric Reality

Central banks historically cut rates six times in a calendar year only during severe economic contractions, acute financial panics, or banking system collapses. If the US economy delivers 2.5 per cent GDP growth and the unemployment rate lingers near 3.8 per cent, the Fed has zero institutional incentive to ease aggressively. Lowering rates into economic vigor risks rekindling inflation animal spirits and reversing months of progress.

A Fed hawk hints at cuts

Tue, 28 Nov 2023 09:54:00 -0500

When Christopher Waller speaks, monetary markets listen with rapt attention. As one of the Federal Reserve’s most influential and hawkish governors, Waller’s suggestion that the central bank could begin lowering policy rates if disinflation continues for several more months sent bond yields into freefall. Interest rate futures immediately priced in over 100 basis points of easing for 2024.

The Real-Rate Mathematical Rule

Waller’s rationale was grounded in unassailable monetary arithmetic: if inflation continues to fall while the nominal policy rate remains pinned at 5.4 per cent, the real, inflation-adjusted policy rate automatically drifts higher, tightening financial conditions passively. To keep policy restriction neutral rather than actively suffocating, the Fed must cut nominal rates in lockstep with falling inflation. A rate cut engineered to stabilize real rates is not a stimulus; it is basic monetary maintenance.

The Fed takes back half its rate cuts

Fri, 22 Sep 2023 15:35:00 -0400

The Federal Open Market Committee's September meeting delivered an unmistakable hawkish message wrapped in a neutral policy hold. While the committee kept benchmark rates unchanged, its updated dot plot sent shockwaves through fixed-income markets by eliminating 50 basis points of projected rate cuts for 2024. The median projection for late 2024 shifted up to 5.1 per cent, signalling an unwavering commitment to prolonged restriction.

Deleting the Pivot

By taking back half of its projected easing, the Fed effectively dismantled the market's cherished pivot narrative. The committee is adapting to structural economic strength by raising its estimate of where the policy plateau must sit. Fixed-income investors who positioned for a swift easing cycle are being forced to capitulate, driving benchmark yields to multi-decade peaks.

The stubborn inflation the Fed can't shake

Fri, 30 Jun 2023 11:18:00 -0400

For Federal Reserve officials scanning the inflationary horizon, the persistent stickiness of core services is becoming an analytical obsession. While headline prints have drifted lower courtesy of energy deflation and supply-chain normalization, May core PCE inflation printed at an obstinate 4.6 per cent year-on-year. The disinflationary impulse in traded physical goods has largely run its course, exposing an autoregressive core driven by domestic service wages.

The Autoregressive Anchor

Services ex-housing are deeply labour-intensive, and their prices do not adjust according to commodity cycles or shipping container spot rates. Instead, they reflect sticky annual compensation reviews and service provider pricing power. Because service consumption is relatively price-inelastic, businesses have had little difficulty passing higher wage bills onto consumers, establishing an inflationary feedback loop that resists superficial policy tweaks.

What the Fed's forecasts really say

Fri, 16 Jun 2023 12:04:00 -0400

The Summary of Economic Projections released at the Federal Reserve’s June meeting was an exercise in quantitative defiance. By holding the benchmark rate steady while elevating the median terminal projection to 5.6 per cent, the FOMC delivered a statistical gut punch to rate-cut optimists. Two additional quarter-point hikes were inscribed into the median path, signalling that the committee regards resilient underlying activity as a direct threat to its disinflationary trajectory.

The Fed wants to pause without looking soft

Tue, 13 Jun 2023 09:22:00 -0400

Central banking is largely an exercise in rhetorical choreography, and the Federal Reserve’s impending June decision requires an unusually delicate routine. With headline inflation cooling to 4.0 per cent year-on-year, the case for a temporary cessation of interest rate increases is tactically sound. Yet the committee is desperate to prevent financial conditions from easing prematurely. The resulting compromise is the 'hawkish skip'—pausing the policy rate while brandishing the threat of imminent future tightening.

Is this the Fed's last hike?

Tue, 02 May 2023 11:02:00 -0400

On 1 May, the Federal Deposit Insurance Corporation seized First Republic Bank in the early hours of the morning and immediately sold the bulk of its assets and deposits to JPMorgan Chase, bringing an orderly, government-engineered end to the second-largest bank failure in American history. Two days later, Jerome Powell’s Federal Open Market Committee announced another 25-basis-point increase in the federal funds rate, lifting the benchmark target range to 5.00 to 5.25 per cent. Yet the true significance of the May FOMC meeting was not the rate hike itself, but what was missing from the committee’s official policy statement: the explicit phrase anticipating that "additional policy firming may be appropriate" had been cleanly excised.

OPEC just made the Fed's job harder

Tue, 04 Apr 2023 13:15:00 -0400

On Sunday, 2 April, the OPEC+ alliance delivered an unexpected geopolitical thunderbolt across global commodity markets, announcing a surprise production cut of 1.16 million barrels per day. Brent crude immediately jumped more than 6 per cent to open above $85 per barrel, handing energy trading desks their biggest single-day gain in a year. The timing of the intervention was deliberately calculated: announced just as the Federal Reserve and European central banks were attempting to assess the disinflationary impact of the regional banking crisis. By aggressively asserting pricing power, Riyadh and Moscow have shattered the comfortable narrative that falling energy prices would deliver an immaculate disinflation.

Are bank failures doing the Fed's job for it?

Tue, 21 Mar 2023 14:57:00 -0400

As the dust settled on the frantic weekend that dismantled Silicon Valley Bank and Signature Bank, Federal Reserve policymakers confronted a radically altered macroeconomic calculus ahead of their March FOMC meeting. The central bank’s H.4.1 release showed total emergency lending to depository institutions approaching $300 billion, reversing months of quantitative tightening in a matter of days. Yet across Wall Street, a new economic thesis took hold: the regional banking crisis had effectively done the Fed’s tightening work for it. If small and medium-sized banks are forced to retreat into balance-sheet defense, the resulting credit contraction will slow aggregate demand far more efficiently than further interest rate hikes.

The Fed's quiet bailout of banks' bad bond bets

Fri, 17 Mar 2023 12:53:00 -0400

When the Federal Reserve published its weekly H.4.1 balance-sheet release on Thursday, 16 March, the numbers confirmed the staggering scale of the banking system’s emergency triage. Borrowing at the Fed’s traditional discount window soared to an all-time record of $152.9 billion—eclipsing the peak levels seen during the darkest days of the 2008 global financial crisis—while the newly minted Bank Term Funding Program (BTFP) provided another $11.9 billion in its first four days of operation. While officials insisted that this intervention was not a bailout because equity holders had been wiped out, corporate finance analysts saw the truth: the Fed had engineered an immaculate, quiet bailout of the commercial banking sector’s disastrous bond portfolios.

Powell signals bigger hikes are back

Tue, 07 Mar 2023 15:43:00 -0500

Jerome Powell’s semi-annual monetary policy testimony before the Senate Banking Committee was an unsparing rhetorical reset. Abandoning the measured, data-dependent cadence of earlier appearances, the Federal Reserve Chair delivered an unambiguous message to lawmakers and markets: if incoming economic data remains hot, the central bank is prepared to re-accelerate the pace of rate hikes back to 50 basis points. The reaction across sovereign bond markets was swift and violent. The two-year US Treasury yield surged past 5.0 per cent for the first time since 2007, while equity indices tumbled as the soft-landing narrative suffered an immediate institutional execution.

Valentine's Day: Markets still love rate cuts. The Fed doesn't love them back

Tue, 14 Feb 2023 13:17:00 -0500

Financial markets have spent the past eighteen months engaged in an unrequited romance with Federal Reserve rate cuts. On Valentine’s Day, as the Bureau of Labor Statistics published a January CPI print showing prices compounding at an uncomfortable 6.4 per cent annual pace, that affection was once again revealed as entirely one-sided. Risk asset traders spent every intermediate dip dreaming of an imminent dovish pivot, interpreting every benign data point as proof that Jerome Powell would soon ride to their rescue. Yet central bankers have made it abundantly clear that they do not share this romantic delusion; the Fed is married to its inflation target, and markets are trading a fantasy.

The inflation number the Fed secretly cares about

Fri, 13 Jan 2023 11:52:00 -0500

The December consumer price index confirmed that headline US inflation is descending from its summer summit, printing at 6.5 per cent year-on-year. Equity markets reacted with their customary enthusiasm, bidding up tech multiples and pricing in Federal Reserve rate cuts before autumn. But anyone who listens closely to the rhetoric emerging from the Eccles Building knows that the Federal Reserve has already moved past headline CPI and even traditional core CPI. The single statistical metric that now dictates US monetary policy is core services ex-housing—what central bank staff colloquially refer to as "supercore" inflation.

The Fed and the market disagree. Someone is wrong

Fri, 16 Dec 2022 16:38:00 -0500

The Federal Open Market Committee raised the benchmark policy rate to a range of 4.25 to 4.50 per cent in December and published a Summary of Economic Projections that penciled in a terminal rate of 5.1 per cent for 2023. Yet futures markets immediately priced in a peak below 4.9 per cent followed by 50 basis points of rate cuts before year-end. This is not an ordinary difference in tactical forecasting; it is a fundamental institutional showdown. Either the Federal Reserve will abandon its stated resolve under the pressure of incoming economic deceleration, or fixed-income markets are nursing a delusion that will end in a violent repricing.

$2trn is sitting at the Fed doing nothing

Tue, 08 Nov 2022 15:20:00 -0500

Every morning across the US banking system, an astonishing sum of capital moves through a financial cul-de-sac: approximately $2.2 trillion in institutional cash is deposited at the Federal Reserve’s overnight reverse repurchase facility (ON RRP). For this cash, government money market funds earn an unencumbered, annualized yield of 3.80 per cent directly from the central bank’s balance sheet. To retail observers, this facility looks like an arcane detail of central bank accounting. To institutional treasurers and bank risk officers, it represents an immense balance-sheet dam, preventing trillions of dollars in liquid capital from circulating through the private real economy.

Why slowing down could mean the Fed goes higher

Tue, 01 Nov 2022 16:19:00 -0400

As the Federal Open Market Committee gathers for its November policy deliberations, interest rate futures are pricing a fourth consecutive 75-basis-point increase, bringing the policy rate to 3.75 to 4.00 per cent. Concurrently, an intense debate has emerged across trading desks regarding the timing and choreography of the eventual monetary step-down. The emerging consensus suggests that the central bank will downshift to a 50-basis-point increment in December, an expectation that has prompted a predictable relief rally in risk assets. Yet this market celebration misinterprets the basic arithmetic of monetary policy: slowing the monthly pace of rate increases is not a prelude to an early pause; it is the tactical mechanism that permits the terminal rate to settle higher for longer.

Nineteen Fed officials, nineteen different futures

Fri, 23 Sep 2022 12:08:00 -0400

The Federal Open Market Committee's Summary of Economic Projections is designed to project institutional consensus and anchor market expectations. In reality, the quarterly release functions as an institutional seismograph, recording the widening intellectual fractures inside the central bank. At the September policy meeting, with the benchmark federal funds rate lifted to a range of 3.00 to 3.25 per cent, the headline takeaway was a median terminal projection of 4.4 per cent for late 2022. Yet behind that comforting statistical median lies a dot plot that resembles a scattergram of profound uncertainty. Nineteen policymakers surveyed the economic landscape, and nineteen different futures emerged.

The inflation the Fed can't fix: your haircut and your dentist

Tue, 20 Sep 2022 12:49:00 -0400

Central bankers like to project an image of omnipotent precision, as though adjusting the cost of overnight money can recalibrate every price tag in the modern economy. Yet the August consumer price index, which delivered an uncomfortable 0.6 per cent month-on-month advance in core prices, exposed the fundamental boundary of monetary policy. While higher interest rates can swiftly depress mortgage applications, liquidate used car inventories, and force silicon chip distributors to write down excess stock, they possess no direct transmission mechanism into the labour-intensive service economy. The Federal Reserve can break the housing market, but it cannot fix the price of your haircut or your dentist visit.

The Fed has found its cheapest weapon: going big early

Tue, 06 Sep 2022 11:06:00 -0400

There is an unspoken economy in monetary policy that central bankers rarely acknowledge in formal testimony: the sheer convenience of panic. By delivering oversized rate increases at the front edge of a tightening cycle, the Federal Reserve is not merely accelerating its schedule; it is actively discounting the future cost of balance-sheet adjustment. When Jerome Powell delivered his eight-minute sermon at Jackson Hole on 26 August, the policy rate sat within an unassuming target range of 2.25 to 2.50 per cent. Yet fixed-income desks had already done the committee's heavy lifting, repricing terminal expectations toward 4 per cent and extinguishing equity multiples that had prematurely anticipated a dovish pivot.