Elementary

Random thoughts from the Fed Decision

This was a monumental week, one for the history books…I’m not referring to the 50bps rate cut. I’m referring to the discovery of the most malleable Element in the Universe: The Monkey Brain!

Think about it. Just last week, the Wall Street Monkeys, the troop that manages trillions of dollars, the supposed Masters of the Universe, the smartest “guys” in the room, had little to no expectation of a 50bps rate cut. All it took to sway their minds was one article by Timiraos and Boom! Their monkey brain got re-wired to expect, to want, to crave that 50bps rate cut! All those macro-economic models, those analyses, those long debates about rates…out of the window. Their monkey brain reacted to one article faster than Pavlov’s dogs to the sound of the bell.

I’m sure Ray Dalio will employ such techniques to get Wall Street to forget his love affection for Diddy but that’s a different story…

Aaaaaanyway, I digress.

In a week that was shook by explosive pagers in the Middle East, it was only fitting that the 50bps rate cut explosion in the financial markets was partially triggered by an explosive Tamagotchi that was lurking in the Fed Meeting!

Back in December 2023, we conceived “Tamagotchi Yellen” as a way to visualize the reaction functions of Policy Makers, and simplify them down to those of a Tamagotchi. We argued that this is a “Re-Election Cycle” and there is a Re-Election Brigade whose incentive is to get their “guy” (now “lady”) re-elected, and even if they fail, at least get their friends rich along the way.

We made a further point that there is a personal bias at play here and, given Trump publicly insulted both Powell and Yellen, we took a wild guess that they both didn’t want Trump as their boss again.

I know I know. This is the point where we get called out for being “conspiracy theorists”.

If that’s the case, so be it. We entered the week 75-80% long with a bunch of calls on top, so our little “conspiracy theory” paid off…again.

In fact, this is the year where people who DON’T believe in conspiracy theories probably lost a lot of money…If that’s you, let me give you a piece of non-financial, parody advice:

• “Humans are Monkeys. Get over it” - Le Shrub

The Dissent

Jesus had 12 disciples. One of them, Judas, betrayed him. The Evangelists portray Judas as weak. But Nikos Kazantzakis, my favorite writer, in “The Last Temptation of Christ” depicts Judas as the strongest of the Apostles and the only one to whom Jesus revealed his Plan. According to Kazantzakis, Judas had the courage and self-sacrifice to help Jesus, and acknowledged that, in order for Jesus to be Resurrected, He must first be Betrayed.

The Federal Open Market Committee (FOMC) consists of 12 Members. In the Fed Meeting of September 18th, Fed Governor Michelle Bowman dissented against the 50bps rate cut, and became the first Fed governor to vote against an interest-rate decision by the Fed since 2005.

To be clear, we are not suggesting that Powell and the FOMC have anything in common with Jesus and the Apostles. But we just wanted to highlight a point regarding the dissent of Michelle Bowman: her dissent was not like the Evangelists portrayed Judas’ betrayal, but more like how Kazantzakis imagined it. Basically, Bowman took one for the team.

You see, the probability for a 50bps rate cut into the Meeting was only 50-60%. So the Fed had to show some face that there is an active dialogue and opinions matter. They don’t. The Game is rigged. Get over it. Make money from it.

The Neutral Rate

The award for the dumbest take from the Fed decision goes to the label “Hawkish 50bps rate Cut”. We went through this here in the "50 shades of 25 - Addendum", but here’s the summary in meme-format:

However, we should highlight one important argument given for the “Hawkish 50bps Cut”:

The Fed acknowledged that the Neutral Rate* is now higher (*The neutral rate is the rate consistent with full employment and low inflation. Yes, it’s a made-up number). The Fed also raised its expectation for the neutral rate from 2.8% to 2.9%.

To prove that this is completely irrelevant, please refer to the beginning of the discussion: “The most malleable Element in the Universe is the Monkey Brain”.

The Fed managed to shift rate expectations for the Sept Fed meeting from a 25ps to a 50bps rate cut using ONE Timiraos article and in ONE Day. You really want me to believe that the Fed’s long-term projection of the neutral rate matters here? It doesn’t. Move on.

Projections

Speaking of projections, there was nothing hawkish in the Fed projections. Take a look at the 2025 projections:

• In the June meeting, the Unemployment rate in 2025 was projected to be 4.2%. In the September meeting, this was increased to 4.4%

• Similarly, in the June meeting, the Fed Funds Rate was projected to be 4.1%. In the September meeting, this was reduced to 3.4%

• Basically, a 20bps increase in the Unemployment projection was enough to trigger a 70bps decrease in the Fed Funds Rate projection!

Unemployment is currently at 4.2%.

Imagine what will happen if Unemployment crosses above 4.4% in 2025! I’ll tell you what will happen: the Fed will take that neutral rate of 2.9% and throw it in the bin…

along with all their previous projections…

What does it all mean?

The Fed was dovish. At some point we will have to worry about the long-run implications of what happened last week. But for now, we are sticking to the Playbook we presented in “What if…it’s Time?” and expanded in “50 shades of 25 - Addendum”. Also, we had mentally prepared for a proper Fed Pivot in a more detailed “What If” piece with our buddy Eliant.

Good luck out there!

Disclaimer:

This isn’t financial advice. This is the equivalent of Monty Python for finance but worse: This is the trading blog of a shrub.

Don’t be Stupid. Seriously. How many times do I have to repeat this ….