Pressure on the Fed Meets Economic Softness

Monetary Policy & Framework - The industry observes an odd timing for a major new framework announcement from the Fed, suggesting it should be addressed by the incoming chairman after consultation [1][2] - The industry notes the Fed's past errors leaned towards excessive transparency and forecasting, leading to iatrogenic volatility, and suggests fewer dot plots and forecasts [2][3] - The industry suggests a return to a more vague and oracular approach, similar to Volcker and Greenspan, given the current challenge of preventing high inflation expectations from becoming embedded [4][5] - The industry emphasizes the importance of symmetry with respect to inflation and learning from the previous framework's shortcomings [6] - The industry highlights the need for careful consideration of the management of the maturity structure of the federal debt, especially when the Treasury and the Fed have conflicting objectives [7] Inflation & Interest Rates - The industry acknowledges persistent inflation above the 2% target, yet markets anticipate a Fed rate cut in September [8] - The industry notes evidence of economic weakening is likely driving market expectations for a Fed rate ease [9] - The industry interprets the market's anticipation of a 25 basis point cut in September as a likelihood, with possibilities of 50 basis points or zero being equally likely [10] - The industry cautions against certainty about future actions, as data could push towards a 50 basis point cut or further delay [11] Economic & Geopolitical Considerations - The industry expresses surprise at the Treasury Secretary's prescriptive stance on monetary policy, suggesting a 175 basis point cut [12][13] - The industry suggests elevated deficit spending, data center spending, reduced trade deficits, and higher asset prices may be raising the net demand for funds, potentially increasing neutral interest rates [15] - The industry expresses disappointment that President Trump hasn't leveraged frozen Russian reserves to drive a just peace with Ukraine [17][18]