This is an audio transcript of the Unhedged podcast episode: ‘Dour Fed, cheery market’
Katie Martin
Who would be a central banker? Sure, you get to wield enormous power over the economy and markets, but no one likes you and idiots in the back seat always think they can do a better job than you can. Still, luckily someone still wants to do it.
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And Jay Powell, chairman of the US Federal Reserve, had his regular moment in the spotlight this week. The boring bit is that the Fed kept rates unchanged. The interesting bit was what Powell and his colleagues had to say about the state of the US economy.
Today on the show, we’re asking what kind of job did he do this month, and outlining the risks without spooking the markets. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT towers in a properly beautiful day in London. And I’ve even seen, in fact, my first set of salmon-coloured men’s trousers in the wild.
Robert Armstrong
Oh. Spring comes to London.
Katie Martin
Spring is sprung, boys and girls. I’m joined down the line from New York by mi amigo Rob Armstrong from the Unhedged newsletter and by his glamorous assistant Aiden Reiter. Roberto.
Robert Armstrong
Si.
Katie Martin
The last time we did this here pod, we were on a stage in Madrid, and it was fun. But now we’re back to the grindstone.
Robert Armstrong
Yeah, it was fun. Now we’re back. I’m back in the United States. You’re back in London. Things are back to normal.
Katie Martin
Now, listeners, I must tell you that we had a very good time in Spain, Rob and I, but had rather too much fun one evening. Alcoholic beverages were consumed. Rob, have you recovered? I have, just.
Robert Armstrong
Barely. We had one of, you know, a historically catastrophic hangover the next day. (Laughter) Terrible.
Katie Martin
I mean, not to go into too much detail, but I think our real mistake was the martinis at the end of the night.
Robert Armstrong
At the end of the night.
Katie Martin
Let’s move on. Fed, Fed, Fed, Fed, Fed, Fed, Fed.
Robert Armstrong
The Fed, yeah. Very interesting meeting, I thought.
Katie Martin
I wanna talk about what they did this week. But first, I wanna talk to you about an interesting new piece of research from CEPR. Listeners, check it out online. Their main point is public perceptions of whether or not the Fed is doing a good job depend hugely on your worldview. So, as they say, individuals who believe the Fed shares their political commitments report higher trust, lower inflation expectations and greater independence. Conversely, those who think the Fed is biased are sceptical about the Fed’s policy and have higher inflation expectations. Isn’t that interesting that like, an organisation that goes out of its way to be as boring as possible attracts such wildly different interpretations of the same set of actions?
Robert Armstrong
Well, that’s consistent with the rest of what we’re seeing in the world right now.
Aiden Reiter
Yeah. I mean, partisanship in America especially doesn’t really listen to reason, right, whether or not . . . It’s like it’s either you’re political or you’re not. And also, most people who follow politics — I mean, I guess the biggest divide in American politics is people who follow politics and people who don’t. So if you don’t follow politics and you don’t know that the Fed is meant to be super independent, you just perceive it as another political institution.
Robert Armstrong
What institution is in good standing with people in general right now?
Aiden Reiter
It used to be the Supreme Court, but no longer.
Robert Armstrong
Yeah. So it’s a symptom of a wider problem. But I’ll tell you, I think the Fed has done a pretty good job. I’m not one of the terrible Fed critics. Yes, they should have raised rates earlier. No, it wasn’t an easy call. And since that initial mistake, I think old Jay has done a pretty good job. Jay and Co, I should say, so.
Katie Martin
Jay and friends. So the paper says — it is an interesting read and very accessible, so check it out, listeners, if you fancy. But 66 per cent of Democrats think the Fed favours Republicans. 60 per cent of Republicans think the Fed favours Democrats. Go figure.
Aiden Reiter
You’re not really giving anybody what they want. That’s exactly what the Fed should be doing.
Robert Armstrong
That’s a good review. Both sides are kind of mildly disgruntled, which is right how you want it, right?
Katie Martin
Mild disgruntlement and disappointment is exactly what this podcast is after. (Robert and Aiden laugh) It’s very much on brand. The conclusion of this paper, for what it’s worth, is that we need more strategic communication from the Fed. I have my doubts around whether that will actually move the dollar (inaudible) people who are just determined to dislike the Fed.
Robert Armstrong
It’s hard. The stuff they have to communicate is so hard.
Katie Martin
Yeah, it’s super hard.
Robert Armstrong
These are tricky things and there’s, you know, and us idiots in the back row just don’t make their life any easier.
Katie Martin
Yeah. So, Rob Armstrong, explain to the class, please: what did the Fed do this week?
Robert Armstrong
The very interesting thing that happened was that the Fed basically brought the bad news. Now, it didn’t say it was gonna raise rates, which would have shocked the hell out of everyone. The universal consensus was that there was not going to be a rate increase.
But if you look at what the committee in aggregate thinks, which is captured in this rather arcane document called the SEP, or the Summary of Economic Projections, which is sort of 15 pages of tables, graphs and charts explaining what the, you know, what the different members and the average member thinks about inflation and unemployment and etc, they kind of universally thought the situation is getting worse on both axes they care about. So both on the inflation axis and on the economic growth of the employment axis they were like, we kind of expect things to get worse, and we’re really uncertain about what’s gonna happen. But all the uncertainty is on the bad side.
Aiden Reiter
Yeah. And we should note it wasn’t that they really changed radically all the projections. It was slight, you know, upticks in inflation and slight downticks in growth.
Robert Armstrong
Right. But both sides, you know, they’re worried about two things: growth and inflation. And both things got worse. Now they’ve sort of cancelled each other out in terms of rate policy. So the rate didn’t move. That is good. Market can breathe a sigh of relief. There’s no horrible shocker in here. But it was a spooky overall picture that they painted. And so it was very interesting that the markets were kind of cool with it.
Aiden Reiter
Yeah, I mean, it reflects a lot of what analysts’ notes have said to us, which is it might be quote unquote mildly stagflationary, which is a strange . . . You know, stagflation feels like an end state, so to be mildly stagflationary is strange to me. But that’s what it was.
Katie Martin
That sounds a little bit like being, like, a little bit pregnant, right, it’s like . . .
Robert Armstrong
Yeah. It’s just a risky state to be in because it can be self-reinforcing, so . . .
Katie Martin
It’s just pregnancy or stagflation. I’ve learnt that. Exactly.
Robert Armstrong
Just being a little bit pregnant tends to lead to being more pregnant, if things take their normal course. So, you know, and of course, behind all this was we don’t understand what is going to happen with the Trump administration’s policies, particularly around tariffs. And in the press conference, Jay Powell was out there. He said a couple things a million times. One of them was, we don’t know what the hell is gonna happen. I mean, that was kind of the continuous mantra. It’s hard. It’s very hazy up there. It’s unusually hazy. All of the members of the committee are confused about the outcomes. And the other thing he said is, you know, we’re worried about tariff policy. That is the source of this uncertainty. It came up again and again and again.
Aiden Reiter
But interestingly, he said that it’s possible that the Fed might be able to look through price rises related to tariffs, should they not change the long-term inflationary outlook.
Robert Armstrong
Yeah, very important point. He didn’t say we’re gonna fight these tariffs with bayonets, rifles and bare hands if necessary. He sort of said we’re watching it. The phrase they use is anchoring. What central bankers like to see is long-term expectations for inflation remaining anchored. That’s one of those magic Fed words, anchored. And they sort of said, if the anchor stays in place and the ship doesn’t start to drift, we are prepared to look past a little bit of short-term tariff-driven inflation. I think that was the the most positive message that came out of that meeting.
Katie Martin
The thing is, the last time they tried to look through some inflation, it went quite pear-shaped. (Laughter)
Robert Armstrong
It’s a good point.
Aiden Reiter
They don’t have a great track record, yeah.
Robert Armstrong
It’s a good point. And that poor Jay Powell was kind of goaded into using the T word. You know the T word, guys.
Katie Martin
Uh-oh. I do.
Robert Armstrong
He actually said the word transitory, which to you, to normal people listening to this podcast, the word transitory might mean temporary. To finance people, it means the Fed is stupid. (Laughter) And somehow he used this word anyway, which is unbelievable. You know, ’cause everyone, just to catch people up on the history, of course, they use the word transitory a lot at the beginning of the pandemic inflation because they thought it was a temporary supply shock. And in classical you look through temporary supply shocks and that kind of inflation takes care of itself. It didn’t take care of itself. Inflation went to 9 per cent and everyone was very upset. And there was a lot of teasing about the word transitory involved.
Aiden Reiter
But then also a lot of fights because there were a lot of diehards that were like, I’m sticking strong to Team Transitory, etc.
Katie Martin
Yeah. There was this whole like thing where there was Team Transitory. And I think like, ultimately it proved to be transitory but like . . . But it’s a very (overlapping speech) . . . .
Aiden Reiter
We’re still in transit, right?
Katie Martin
We’re still in transit.
Aiden Reiter
Like deflation’s still high.
Katie Martin
Yeah. It’s a very loaded word. So transitory is . . .
Robert Armstrong
I mean what undoubtedly happened is inflation went down much faster than Team Antitransitory said it was. Team Persistent got the initial very steep and fast fall in inflation wrong. So everybody got to be a little bit wrong.
Aiden Reiter
Isn’t that the most American way to? (Laughter)
Katie Martin
Transitory — very loaded word. Stagflation, which is not the word that he used, right?
Robert Armstrong
That word did not come up.
Katie Martin
But stagflation, well, you have. No, this does not come out of central bankers’ mouths.
Robert Armstrong
We do not say that word out loud.
Katie Martin
No. But this situation where you have a stagnant economy and rising inflation, no bueno. Nobody likes stagflation. So how come the market didn’t lose its marbles about this analysis?
Aiden Reiter
It’s possible the market and what we’ve seen in the market over the last two to three weeks has just been the market already pricing in stagflation, right? We have really bad sentiment data, which has not shown up in the hard data yet on the economy but, you know, people expect there will be lower growth this year.
Also, inflation has remained hot, even though we got a kind of OK CPI report. There’s a lot of people who believe that we could have hotter inflation next month or in this month’s PCE, which is the measure of inflation the Fed looks at more closely. So it’s possible the Fed already kind of like just confirmed what the market was already thinking.
Robert Armstrong
Was already thinking. I think there’s another . . . I mean, you know, it’s very . . . It’s chancy business you get into kind of anthropomorphising the market and saying the market thinks X or Y, but just ‘cause it’s chancy doesn’t mean I’m not gonna do it. (Laughter)
And, you know, I think the rates stayed the same. Powell got up there and was very measured and reasonable. Everybody in markets has been busy getting punched in the face for about a month now, and they were just ready for some good news. So kind of that’s what they heard. I think undoubtedly Aiden is right that the message had already been somewhat transmitted, but just the fact that the Fed didn’t say anything even more aggressive about tightening in the future — Powell sounded very measured and the rates didn’t move. That was enough for markets to take a little sigh of relief. I will note that as of this morning, markets are shading down a little bit. But we’ll see how that develops.
Katie Martin
This morning is — is it Tuesday? It’s Tuesday.
Robert Armstrong
No, it’s Thursday.
Katie Martin
It’s Thursday. Who knew?
Robert Armstrong
It’s Thursday. (Laughter) Four-day hangover strikes again. (Laughter)
Katie Martin
(Laughter). Never again.
Aiden Reiter
And then the Treasury market barely moved. And that’s because it looks like the course of rate changes is not going to be different, right? The consensus that Rob said before is if you have a little hotter inflation and a little lower growth, you keep the rates kind of where they’re going to be.
On top of that, we don’t really have the best indication of inflation yet. It seems like the Treasury market has been muted for the past month. And that’s because they’re waiting for more inflation data to come out to really see what the Fed might do forward.
Katie Martin
Well, it’s got a lot of competing forces going on as well, hasn’t it?
Aiden Reiter
Yeah. And there also was some good news yesterday from the Fed meeting, which is they said they’re gonna start slowing down quantitative tightening.
Robert Armstrong
Let us now explain to regular human beings, of whom there may be a few in our listenership, you never know, what . . .
Katie Martin
(Laughter) Hello, humans.
Robert Armstrong
(Laughter) Greetings, humans. What quantitative tightening is.
Aiden Reiter In times where the economy look like it’s gonna buckle, or there are issues with financial liquidity, the Fed infuses a lot of cash into the system . . .
Robert Armstrong
By buying Treasuries.
Aiden Reiter
. . . by buying Treasuries from the banks and from, you know, other people in the system. So that puts cash in. But that means the Fed has this really big balance sheet. Quantitative tightening is unwinding that balance sheet. So it’s allowing those Treasuries to age out to mature out. That has the potential to explode on the market because you don’t really know when you have the right level of reserves and the right level of liquidity. So it’s possible they overstep that, and then you have some market meltdown.
Robert Armstrong
I will dumb that down even further. The Fed is either shoving cash into the system in the hopes that will make everybody remain calm, or it is carefully pulling cash out of the system to restore some kind of sanity. So it’s like putting the medication in, which is increased liquidity or cash, and taking the medication off, which is pulling it out. And the Fed has been taking the financial system, the economy, off the medication.
Aiden Reiter
Yes. There’s a lot going on this year. The Fed is theoretically concerned about conversations about the US national debt and deficit, which will be probably a politically contentious issue this year. According to January’s meeting notes, it looks like the Fed is concerned about having quantitative tightening coinciding with questions around the US national debt. The US national debt is really big, and there’s going to be some big political conversations about how we’re going to rebuild the Treasury this year. When the Treasury does eventually start issuing more debt, that pulls out cash at the same time, theoretically, as the Fed would be pulling out cash from the system with QT. So the idea is the Fed wants to avoid clashing with the Treasury when the Treasury starts to rebuild its debt later this year.
Robert Armstrong
There was also an interesting point about it, which was that the chairman, Jay Powell, kind of bent over backwards a bit to say this has nothing to do with the debt ceiling or political situation or anything else. This is a purely technical manoeuvre.
Aiden Reiter
Yeah. But if you look at the January minutes, the reason they said we’re gonna pull it up is explicitly because of concerns about the deficit.
Robert Armstrong
So, you know, it’s one of those things that almost always in some way means it’s the opposite. (Katie laughs) It’s like, you know, when you see a sign that says no exit, it means that there’s an exit there. And similarly, when a central banker says this is a purely technical manoeuvre, what they mean is this is not a purely technical manoeuvre, right? Because otherwise they wouldn’t have to point it out.
Katie Martin
You’re a very paranoid person, yeah.
Robert Armstrong
My work is (inaudible) a cynic.
Aiden Reiter
Also, I’m concerned what happens to you if there’s a fire in the building. (Robert laughs) You’re gonna run towards a no-exit sign. (Laughter)
Katie Martin
Let’s not try that out. But like, speaking of like, the US’s just bin-fire politics, I noticed that Donald Trump, the president, was like, posting away on Truth Social after the Fed decision, saying they should cut interest rates now.
And I am old enough to remember when this would have been like a huge deal in markets, that the president would say anything at all about Fed policy. This is just like not the president’s domain at all. And normally, presidents go out of their way not to interfere. And I just think it’s…
Robert Armstrong
Well, in public they do. We have a proud tradition of presidents being awful to the chairman of the Fed board behind closed doors.
Aiden Reiter
Even when it’s somebody they appointed, as in this case where Trump appointed Jay Powell.
Robert Armstrong
Yeah. So that’s been going along, I think. You know, the theory, you know, Lyndon Johnson threatening the chair with violence I think is something that may well have happened, but . . .
Aiden Reiter
Yeah, he threatened a lot of people.
Robert Armstrong
(Laughter) He did that to everybody. But I agree. There’s, you know, this is one of many changes in tone in the current administration, that they will say it outright. They don’t sort of respectfully disagree, which might be as far as another president might have gone. They say you’re getting it wrong, please do something different.
Aiden Reiter
What’s interesting as relates to what Katie mentioned earlier, is people’s perception of the independence of the Fed. If you ask some people in Trump’s economic circles and, you know, Trump’s orbit, they also have concerns about the independence of the Fed. But their point is it’s about the personnel. So when you ask them, it’s like, oh, it’s not that the Fed is independent. We just don’t think the people in the Fed have an independent spirit in mind.
Robert Armstrong
Basically, it’s a bunch of Democrats, is the claim made against them. And I think looking at the donations they make, which are a matter of public record, it is, broadly speaking, a bunch of Democrats.
Aiden Reiter
But Jay Powell is Republican.
Robert Armstrong
He sure is.
Aiden Reiter
(Inaudible) I mean, there’s plenty of them who are conservative or just non-political. And if they’re doing their jobs, they’re not in politics.
Katie Martin
How about that for a beautiful narrative arc that takes us right back to our initial point, which is, no one trusts the Fed.
Robert Armstrong
No, I think they do. I think they do. And I think, you know, there’s always gonna be a lot of criticism. There’s always gonna be a lot of noise. But we know, to the degree we know anything at all in economics, we know that independent central bank is better for your economy than a central bank that works for the executive. This is a well-understood point. And right now I think, you know, in their heart of hearts, the people who matter believe that is happening still.
Katie Martin
Chairman Powell, if you’re listening, we know you’re doing a very difficult job. Good luck to you. (Robert laughs)
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We are gonna be back in just one second with Long/Short.
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Okie doke. It’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Aiden, I’m gonna pick on you first.
Aiden Reiter
I am short Turkish democracy. Not that I’m against Turkish democracy, but I’m concerned over the recent moves by President Erdoğan to imprison his chief rival. You know, no market or no economy does very well when the rule of law breaks down. And there’s been problems in the past in Turkey with Erdoğan both not respecting the rule of law and not respecting economic policymakers, which allowed inflation to just kick off and really, really caused a lot of pain. So a lot of investors, a lot of people are concerned now that since he’s not respecting the opposition, he will no longer respect the central bank, as he has for about two years now.
Katie Martin
Yeah, it’s all a bit of a flashback to a very dark time in Turkish markets. Rob, tell us what you got.
Robert Armstrong
Pair trade! We all know that the value of Tesla has been falling like a stone, but there was a nice story in the FT that according to its latest fundraising round, the value of Twitter, now called X for reasons known only to Elon Musk, has gone up a lot. You know, for briefly it was like a $10bn company according to one valuation round. Now it’s over 40 again.
Aiden Reiter
But it’s about this price that he bought it for.
Robert Armstrong
Yeah. No, that’s fine. But I think what we’ve learned is Elon Musk is getting better as a social media star and worse as a car company executive. And I expect those trends to continue. So I am long Twitter and short Tesla.
Katie Martin
How about that? I long of a story I’m loving today about how Europe has caught the meme stocks bug. Did you see the story?
Aiden Reiter
No.
Katie Martin
Our colleagues Mari, Jamie and George wrote a really fun story about how you remember how the US went, like, nutty in that Covid period where a bunch of, like, retail traders started trying to take down hedge funds and bet really heavily?
Robert Armstrong
Yes. I saw the movie. Yeah, it was great.
Katie Martin
Yeah. So there were people betting really heavily on stocks like GameStop that hedge funds hated. And anyway, it’s happening in Europe now. There are like message boards on Reddit for like French retail traders and German retail traders who are doing stuff like piling into Luxembourg-based satellite companies and tiny German defence stocks to try and bring down the bad guys. One of them said . . .
Robert Armstrong
I love it.
Katie Martin
I know. One of them was saying, I don’t care about profit. I just wanna pool some of my money to help a move away from US assets and asset managers. Booyah! Fun times in European markets. I love it.
Robert Armstrong
Wow. That stings a little bit.
Katie Martin
It stings. And it’s not very European. Like, you know, it all kind of links back to this idea that European markets are back, baby. We’ve even got meme stocks and everything. Who knew?
Aiden Reiter
To all the good and all the bad.
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Katie Martin
Yeah, exactly. Yes. We don’t want all of your American nonsense, just bits of it. Listeners, we will be back in your ears on Tuesday. I definitely do know what day it is. Thursday today. Tuesday next time we have a podcast go out, so listen to us then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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Robert Armstrong
(Speaking in a British accent) The central banker emerges from his pupa in the spring in order to set monetary policy for the new year. But look on the horizon. It’s a rogue trader.
