Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / The Fed's New Data Dependency
Transcript
- Lucas: Look at the chart for a second. The S&P 500 just hit seven thousand seven hundred twenty, up one point three percent over the last five days. It feels like we’re in a bull market run, right? But if you look at the underlying mechanics, specifically that third-quarter GDP print of three point four percent, it’s not just momentum. It’s friction. Luna: Friction meaning the economy is still burning through resources faster than the Fed wanted it to? That three point four percent number is aggressively above trend. Lucas: Exactly. And that’s why the Federal Reserve isn’t cutting rates next month. We have the Fed Funds effective rate sitting at three point seventy-five percent as of early September, and the daily rate holding steady at three point eighty-eight percent yesterday. The market expects a pivot, but the data says wait. Luna: So we’re watching Kevin Warsh’s commentary more closely than usual because he’s essentially telling Wall Street to stop pricing in ease before they’ve earned it? Lucas: That’s the dynamic. Warsh has been keeping everyone guessing, and frankly, it’s working as a tool. By staying ambiguous about the path, he forces asset prices to adjust to reality rather than hope. And the reality right now is that core CPI ticked up to three hundred thirty-eight point nine last month. Sticky services inflation is still there. Luna: It’s interesting because everyone is focused on goods inflation dropping, but services keep pulling the average up. Is that the new normal we have to accept? Lucas: I think it’s a structural lag. Wages are growing, and when wages grow, services prices follow. You can’t cut rates aggressively when that feedback loop is intact. So the Fed is effectively pausing, letting the three point four percent GDP growth cool naturally without adding fuel to the fire. Luna: But doesn’t that pause create its own risk? If the economy slows too fast while they sit on their hands, we could get a hard landing instead of a soft one. Lucas: That’s the tightrope. And this brings me to something I want to mention because it keeps this show going. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo — that’s F. E. X. I. N. G. O. — and that’s literally what funds making these deep dives possible without ads interrupting your commute. Luna: Yeah, it’s great to have that direct support so we can actually dig into the numbers instead of chasing clicks. Lucas: Right. Back to the data. The ten-year Treasury yield is hovering around four point ninety-nine percent. That’s a key benchmark. If rates stay higher for longer, that yield curve pressure starts biting into corporate borrowing costs, especially for small caps. Luna: And we saw the Russell two thousand jump three percent recently, which suggests investors are betting the Fed will blink first. Do you think they’re wrong? Lucas: I think they’re underestimating the political weight Warsh carries. He knows that premature easing looks weak. So he’s leveraging his reputation to delay the pivot until the inflation data is unambiguous. And with breakeven inflation at two point three eight percent, the market is still pricing in some upside risk. Luna: So the pivot isn’t dead, it’s just delayed. What’s the specific trigger that would force the Fed’s hand in November or December? Lucas: A sudden drop in jobless claims or a sharp reversal in housing affordability metrics. Right now, the labor market is resilient enough that the Fed doesn’t feel panic. They have room to wait. Luna: It feels like a test of patience for investors. Everyone wants the relief rally, but the fundamentals aren’t ready for it yet. Lucas: Precisely. And that’s why I’m looking at the PCE price index, which came in at one hundred thirty-two point three. It’s slower than CPI, but the core component is still ticking up. The Fed trusts PCE more, and it’s not giving them the green light yet. Luna: So they’re waiting for the PCE to dip below two percent consistently? Or are they comfortable with a bit of overshoot? Lucas: They’re comfortable with overshoot if it’s transitory, but they’re terrified of entrenched inflation. And with the European Central Bank keeping rates on hold at two point five percent globally, there’s less external pressure to move quickly. Luna: Global coordination is minimal right now. It’s every central bank for itself based on domestic data. That makes the Fed’s independence both a strength and a liability. Lucas: It is. And here’s the thing about that liability: if they wait too long, they risk crashing the very market rally they’re trying to stabilize. But if they cut too soon, they reignite the inflation beast. Warsh knows this calculus better than anyone. Luna: He’s essentially using ambiguity as a shock absorber. Let the markets digest the slow grind rather than getting whipsawed by sudden moves. Lucas: Exactly. And for you as an investor, that means positioning for volatility, not certainty. Don’t bet on a clean cut next month. Bet on a messy, data-dependent timeline. Luna: So diversification becomes even more critical when the central bank is playing hide and seek with rate paths? Lucas: Absolutely. Cash becomes attractive again when real yields are near five percent. Why chase risky equities when you can earn nearly five percent risk-free on short-term treasuries? Luna: That’s a compelling argument for liquidity. I’ve been watching the money market funds swelling up. People are parking cash while they wait for clarity. Lucas: And that liquidity pool is a time bomb. Once the Fed signals a clear cut, that cash floods back into the market, potentially inflating assets beyond fundamentals. It’s a classic cycle. Luna: So the real story isn’t just the rate decision, it’s the massive inventory of dry powder waiting on the sidelines. Lucas: Spot on. And that dry powder is what keeps the VIX low despite the uncertainty. Investors know the relief is coming, they just don’t know when. That expectation props up valuations. Luna: It’s a confidence game played by the Fed, funded by retail and institutional cash. Who wins when the game ends? Lucas: The ones who stayed liquid. The ones who didn’t lever up chasing yields in a zero-rate world that hasn’t arrived yet. Patience pays a premium right now. Luna: So we watch the upcoming jobs report and the next CPI print like hawks. Those are the only two things that matter. Lucas: Those and any unexpected commentary from Warsh or other FOMC members. Their words are moving markets as much as the data itself. Luna: Language as policy. It’s almost poetic in its manipulation. Lucas: Or just pragmatic communication. Either way, it’s shaping our financial landscape. I wonder if we’ll see that first cut before Christmas this year. Luna: My money is on January. Give them one more quarter to prove the inflation fight is won. Lucas: January it is then. Until then, we watch the ten-year yield and keep our powder dry. Luna: Sounds like a plan. Stay curious, stay liquid. Lucas: Thanks for listening. Let’s see if the data surprises us next week.