Hello my friends. Today is December 10th and this is my December FOMC debrief.

All right, we just had the press conference and let me tell you, I think it was a super interesting meeting and surprisingly surprisingly dovish. Now before we talk about what happened today, let's level sit a little bit.

Now heading into this meeting, everyone widely expected that the Fed will cut, but that was not always the case. Now in September, the Fed did guide towards a cut here in December. But then remember the last meeting, PAL basically started the press conference saying that additional cuts are far from guaranteed, noting that there was a lot of dissent on the FOMC.

In the weeks that followed, we began to hear more about these descents. We have all these Fed presidents come out and say that, you know, we we shouldn't be cutting rates anymore. You know, inflation's a problem and so forth. And so after hearing that the market priced out a December cut.

However, uh just as blackout period was beginning, blackout period is the period before a Fed meeting where Fed officials are no longer allowed to speak. We had some heavy hitters come out and say that you know rate cut in December. I I could support that.

Now the way that the Fed works is that whereas you know a lot of people on the committee Fed presidents can vote on a rotating basis um each person is unequal in their influence. Now as it turned out the guys that have been on the committee for a long time people who are more influential and have a track record of being correct they were voting for cuts and the guys who are new um they were more hawkish and they did not get their way.

So that uh brings us to today where we did get indeed a Fed cut. And looking at uh the voting, it looks like we also got desents. We have Governor Myin of course uh would like to have 50 basis points. He's done this a few times now. And we also have a couple Fed presidents who desented preferring not to cut at all.

So but in any case, Cherpaw was able to muster together a majority and push through a cut. Now, this was also one of these special Fend meetings where we got a dot plot. Remember, we get the dot plot quarterly. And on the dot plot, what each Fed official marks down is their forecasts for inflation, for rates, for uh Fed policy over the next few years.

Now what's really interesting about this stop plot is that it was mostly unchanged except that um inflation was actually forecast uh the for to be better. So they lowered their inflation forecast. U the median Fed participant lowered their inflation forecast. So you know having more disinflation of course uh is suggestive of uh more rate cuts since of course inflation is expected to to get better.

Now one other thing that happened of course was the balance sheet thing which which we'll talk about a bit later. So I found the press conference to be very interesting because it kind of gives away the Fed's hand and struck me as very very dovish.

Now as we know the Fed has two mandates, full employment and price stability. Let's listen to what Chowo thought about employment. Payroll jobs uh averaging 40,000 per month since April. We think there's an overstatement in in these numbers by about 60,000. So that would be negative 20,000 per month.

>> So chairp is basically saying that you know our official numbers government data is saying that we created on average you know 40,000 jobs a month but based on our own data we're thinking that post revisions it's actually more like negative 20,000 a month. Now, if we are losing 20,000 jobs a month, obviously that is a problem and obviously that calls for not just neutral monetary policy but uh easy policy. So that in my view opens the door for more cuts than the market is pricing in.

Now a more hawkish person would say yeah we're losing jobs but also in part because our population growth has slowed a lot. Yeah, but I think by any measure, losing 20,000 jobs a month is going to continue to push the unemployment rate higher. That that's actually I think if we got an NFP print and we're going to get one next week, that that had a negative number. I think the market would react very strongly by pricing in a lot more cuts.

At the moment, the market is pricing in we get two more cuts next year and stop at around 3%. that is uh under the power fed what the medium voter considers to be the neutral rate.

So moving on to the inflation uh data. So again as we all know inflation is higher than the Fed's target. It's about 3% though they forecast it will continue to decline. Here's what Paul said about inflation.

The story with inflation and uh you know we're well aware that this is a story at this point is that if you get away from tariffs inflation is in the low twos right so it's really tariffs and that that's causing the most of the inflation overshoot and we do think of those as likely to in the current situation as likely to be a one-time you know one-time price increase.

So what he's saying is that yeah, it's it's above target, but that's mostly due to tariffs and tariffs are temporary. So you take that out, yeah, we're basically at 2%. Now, you know, you put two and two together, inflation basically at 2%, labor market in trouble. That's a that's a call for policy to move to um easing.

So I think that's um not in the market. And looking at assets like gold and silver, that's uh quite bullish for them. Harder to say on the equity market, um on the one hand, rate cuts are positive equities. On the other hand, recession is not positive for equities. If I had to bet, I would guess that the equity market cares more about rate cuts.

Now the other thing that was super interesting that happened this is that the Fed announced its restarting of reserve management purchases. So what they said is they're going to start buying uh Treasury bills to the tune of 40 billion a month for the next few months and then adjust thereafter.

Now the way the reason they're doing this is because there's upward pressure in the money market rates and we're also heading towards year end where often times there's significant pressure in money market rates. So they don't want to have another, you know, re repocalypse as they call it where repo rates surged in late 2019. So, they're getting ahead of this.

And I would also note that all the way back in November, I had called this and at that time it was super non- consensus. And uh some people were on Twitter calling me stupid. Uh but that is exactly what happened today guys. Everyone has different levels of expertise and different domains and so forth. But when it comes to money markets, the financial system, uh, well, listen, I I spent a number of years on the open markets desk having access to tons of confidential data, tons of conversations with market participants. This is something that I am really, really good at. And so, it was not hard for me to see that this would happen. If you understand the financial system and the Fed and I'd also note last week, one big bank, Bank of America, also jumped on the bandwagon. and uh today we were both proved correct.

So very interesting and of course I personally don't really think of this as having too big of an impact on markets but I also know that there are people uh who perceive this to be risk positive and that's kind of enough.

All right so that's how I prepared for today super interesting Fed meeting and next year you know everything is going to change. Uh yesterday there was a headline that President Trump was uh looking at the Fed and he was like, you know, some of these Fed governor appointments, they were signed maybe by the autopen. Maybe someone should look into that, right?

You can't have the autopin sign it. That's uh that's not correct. And of course, he's probably joking, but you know, they're going to turn up the pressure and find ways to have more control. Uh let's see what they do. All right, talk to you guys um Saturday.