Jack Farley & Max Wiethe on Fed Hawkishness & Steep Stock Market Sell-off
Monetary Matters with Jack Farley
Deep Dive
Why did the stock market react so negatively despite the Fed's interest rate projections being in line with market expectations?
The bond market had largely priced in the Fed's hawkishness, but the stock market, which is composed of different investors, did not fully anticipate the implications. Powell's explicit mention of hawkishness amplified the shock, leading to a steep sell-off.
What was the key technical change the Fed made during their December 2024 meeting?
The Fed lowered the reverse repo rate by 30 basis points instead of the usual 25, aligning it with the lower end of the Fed funds rate. This tweak was aimed at preventing repo rate pressure.
How does the market currently price the Federal Reserve's interest rate cuts for 2025?
The market is pricing in approximately one interest rate cut for 2025, while the Fed's dot plot suggests two cuts. There is a significant divergence, with the market seeing a 90% chance of no cuts in January 2025.
What does Jack Farley believe is the primary risk driving the Fed's future policy decisions?
Jack believes the primary risk is a recession rather than renewed inflation. As inflation falls, real interest rates rise, necessitating rate cuts to maintain economic stability.
How does the Fed's unemployment rate projection for 2025 compare to its previous estimates?
The Fed's median unemployment rate projection for 2025 is 4.3%, slightly higher than previous estimates. However, this contradicts Powell's statement that unemployment would rise by 0.6% over the year due to labor market dynamics.
What does Max Wiethe think about the potential for further stock market volatility in the near future?
Max is concerned about potential carry-through volatility due to year-end dynamics and positioning. He notes that the market has been complacent, and any unexpected moves could lead to significant follow-through in either direction.
Why does Jack Farley think the dollar could strengthen relative to the euro?
Jack believes the U.S. economy is stronger than Europe's, and if the Fed cuts rates less than the ECB, the dollar could strengthen. Additionally, a global recession could lead to a dollar squeeze, further boosting the dollar.
What does Jack Farley think about the Fed's handling of inflation and interest rates?
Jack believes the Fed is sticking to its guns on inflation, but the market is skeptical. He thinks the Fed has room to cut rates if needed, but the market is overly optimistic about the likelihood of fewer cuts.
How does Jack Farley view the impact of tariffs on the Federal Reserve's policy?
Jack believes tariffs are inflationary and should be factored into the Fed's interest rate decisions. He argues that the Fed should not ignore the fiscal impact of tariffs, as they can significantly affect consumer prices.
What does the Fed's summary of economic projections indicate about their uncertainty regarding inflation?
The Fed's summary shows increased uncertainty about inflation, with more participants noting higher uncertainty compared to previous projections. This reflects the potential impact of new fiscal policies, including tariffs.
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