Hello, my friends. Today is July 29th, and this is my July FOMC debrief. All right. So, I just finished watching Kevin's second performance, and honestly, it was awful. But, before we get into it, let's take a step back and review what happened. So, between the last meeting and now, a lot of things have happened, actually. So, the last meeting was pretty obviously hawkish, and since then, uh FOMC members have tended to be more hawkish. They were worried that um inflation really wasn't heading in the right direction. So much so that Governor Waller was actually very openly saying that if we continue to have these bad CPI prints, you know, he's going to have to hike and, you know, very soon. Um but, the inflation data actually was pretty soft. CPI, uh core CPI was actually super soft, one of the softest readings we've ever had on a month-over-month basis, zero. However, though, the Fed perceives inflation to be driven by three things. One is tariffs, two is the AI buildout, and three is energy prices. Now, even though we had a soft print last month on inflation, we're looking at, say, energy prices. Well, it looks like the war is heating up, and that's worsening. If you look at the AI buildout, it looks like that is uh something that's ongoing and might accelerate as well. So, inflation is still a problem for the Fed. The market priced in two hikes this year heading in, um starting sometime in September. I personally thought that there was a good chance we could hike today. Uh so, the market was pricing in a 30% chance of a July hike. Now, this is a different Fed now. This is a Fed that openly tells you they are willing to surprise the market. So, I thought it would be a good time to hike, since if you don't hike now, later on when you hike, you're going to be hiking right by the midterms, and you really don't want to be doing that. It's going to have all sorts of political implications. Now, heading into the meeting, of course, the meeting happened, and right off the bat, the market was pleasantly surprised because there was no hike. However, it was very obviously a hawkish press conference because we had three dissents, three Fed voters would have liked to hike rates this time. Um the press conference, Kevin, of course, just kind of got on stage and he said a lot of hawkish stuff. The sitting bit itself is also pretty hawkish, emphasizing price stability, and generally pretty upbeat about the um labor market. I I will note though that there are shades of that that seem to suggest that this is, you know, going to be productivity boom, and um this is a negative supply shock, which in economic speak suggests that you should look through it. But overall, there's a high emphasis on price stability, which you would take on face to be more hawkish con- uh conference.

Now, going into the presser, now, you know, this guy he says a lot of things, and what really struck out to me were two things, actually. So, first off, now, Kevin has this belief that um the Fed's two mandates are not in conflict. So, historically, we think that the full employment and price stability mandates are in conflict because, say, when uh inflation is too high, you hike rates to try to lower demand, and that usually has a negative impact on the labor market. Similarly, when you say that unemployment is too high, you can cut rates, and that's to stimulate the economy, and that could have an upward impact on inflation. So, these two conflicts these two mandates are in conflict. That's, you know, pretty traditional. Honestly, I I actually don't think it's that controversial. Um but Kevin actually openly told you that he doesn't believe that, and when asked about, "Okay, so if you don't believe there's a conflict between your two mandates, how do you think what's the mechanism through which monetary policy works?" And And is what he said.

Uh Chairman Waller, I want to follow up on Colby's question about policy transmission. You've said there's no cruel choice between stable prices and full employment. Um, rates bring inflation down by cooling demand. It's generally thought that can show up in the labor market. If that's not the channel you're relying on, what is? In terms of transmission mechanisms of monetary policy, I think different tools work through different transmission mechanisms. The interest rates work through lending channels and credit channels, maybe confidence channels and foreign exchange. The balance sheet probably works through some other channels like signaling and portfolio balance. We're keeping fully abreast of all these tools in making policy. But if the suggestion is somehow we're going to be fine-tuning aggregate demand so it catches supply, that's not my mental model. I don't think we're great in the fine-tuning business. We're trying to get supply and demand in broad order, but really what we're doing as we sit here today at this press conference is I think we've got a reasonable sense of what aggregate demand looks like in this economy. We're inferring aggregate supply. We're making a judgment about what productivity is. And in some sense, there's a race between supply and demand. And the surge in business CapEx in and around AI is making that calculation a little harder to judge, but in the period ahead, we're going to be trying to judge just that. So, listening to that, I honestly didn't hear a mechanism. It sounded like this long-word salad, and it brings me back to my concern about Kevin becoming Fed chair. Now, Kevin has been in the public spotlight for some time, so we already know what he what he thinks, what he's done. He was also a former Fed governor. Now, he did a very bad job when he was Fed governor. He was always too hawkish, even on the eve of the Lehman disaster, the great financial crisis, he was also pretty hawkish. Now, after the great financial crisis, he was still hawkish. So, again, he's been on the wrong side of the policy debate and shows someone who was has poor judgment. Now, one of the reasons why he has been so hawkish is that he has a framework where he basically it's called monetarism, where he thinks that the quantity of money has a very big impact on economic activity. And so, he saw the Fed's expanding of the Fed's balance sheet, you know, QE, printing money to buy bonds to be very inflationary. It was totally reasonable. Many people felt that way. Um but that was just not true. Um that was an incorrect understanding of how the world worked and for the decade after the great financial crisis, we basically had very low inflation. Now, even after a decade of evidence against his framework, Kevin really hasn't changed and so, he's still saying the same thing. So, that was a concern to me because that tells me that he's someone who cannot learn. Basically, someone who is a an ideological person, someone who approaches the world through magical thinking, right? Your beliefs are not adjusted according to evidence, they are just given to you by ideology or whatever. And of course, he used to work at a think tank. So, this is another good example of magical thinking where he would just make this big claim, there is no trade-off between employment and price stability. And then fail to tell you why. So, doesn't make any sense. There could be some context where there there is no trade-off, for example, honestly, a huge technological boom, for example, may possibly do that when that actually doesn't destroy too many jobs. But again, these are broadly speaking though, I think it's not controversial to think that there is a conflict between the two mandates.

Now, the next thing though that he talked about, and this is the one that I think really concerned the markets. If you look at the markets, you can see that the front end to belly rates went lower and that is because the Fed is not hiking. So again, Treasury yields largely reflect the expected path of policy. But we go beyond that to the 30-year long bond, that's much less about the path of policy, more about supply and demand. And you saw that yield basically explode higher during the press conference. And that's the market becoming concerned about the Fed's commitment to to price stability. Now, why would the market feel that way after Kevin, you know, kind of did his best uh Hollywood impression of a hawkish person and just kind of said price stability all the time? Well, I think it has to do with this exchange. Let's listen now.

When you talk about the 2% inflation target, what measure are you relying on? Yeah, so I'll give two answers. First, let me give the proper standard answer. The The Federal Reserve every January outlines a statement of purposes and strategy. And in that strategy document, which I believe was dated January of this year, it describes a measure of PC inflation as the as the objective function there. Um I have enough of my own So that that's our number, we're sticking with it. Who knows come after next January what we might say about strategy. I suspect the task forces might might have something to add. But I'll say this, some version of the Lucas critique, some version of Goodhart's law in economics should remind us that when we talk about uh measures of inflation or something else, and we describe those measures as being consistent with our objectives, we might make them such that they're not very good measures or very good objectives. Broadly, if you said to me standing in front of you, I abide fully by the strategy document. We're going to deliver 2% inflation and not a whisper more. But to achieve that, I'm looking at a broader set of inflation data than PCE. So without sort of fully revealing my cards, um I'm trying to understand like my colleagues what's the underlying generalized change in prices that are happening in the economy. So basically Kevin is asked about how he measures inflation. Now that's just as important as inflation target, right? He's going to tell you that he wants to target 2% inflation exact, but then he how do you measure that, right? That if you measure it differently, you could have very different outcome. And he basically just kind of I thought fairly nonchalant nonchalantly said that, you know, yeah, I'm supposed to tell you that it's PCE, but actually that's not really how I think about it. And I'm not going to tell you how I think about it. So basically you have a Fed chair that's going on stage and he has an inflation target that's not really measured by PCE and it's a secret. So if you're a bond investor, what are you supposed to do with this? You have a Fed chair with a secret inflation target. Well, obviously that's not very comforting, right? So I think that materially increases the risk for someone who's holding the long bond. So I think that was bad and that's going to impact broader risk assets as well. So all in all this press conference was I think very poor performance and honestly Kevin would honestly it would serve him better if he actually took his own advice and just stopped talking to the press cuz this was a disaster and he needs to stop doing this. All right. So that's what I prepared for today. Come back. I'll talk to you guys again on Saturday.