A Fragile Memorandum With Iran
The recently announced U.S.-Iran memorandum of understanding leaves a great deal to be desired from a strategic standpoint. Viewed through the lens of geopolitical intelligence — the kind assembled by working with retired generals, admirals, and former CIA and NSA personnel — the agreement is, on balance, a minor disappointment. The reasoning is that the United States may have been in a position to push harder. The early military campaign was a significant success, and the subsequent ceasefire appears to have played into the other side's hands rather than maximizing American leverage.
That said, the market's enthusiastic reaction is entirely understandable. The crucial fact for markets is that the Strait of Hormuz is open, with Saudi ships transiting that very day with their transponders switched on. From a purely economic perspective, this development relieves pressure on both the Middle East region and the broader global economy. The flow of oil and commodities is what matters most to traders.
Even so, this does not feel like a particularly strong agreement. The situation remains fragile because the deal sits inside a roughly 60-day negotiating window, and many things could go wrong during that period. Trump could become dissatisfied with some element; Iran could object to something or refuse to take an action it is expected to take; or Israel could step in and escalate its attacks on Hamas or another party. Any of these could unravel the arrangement. In short, the memorandum is good for markets but not as good for the world as one might have hoped.
This distinction reflects a broader truth about market priorities. As market participants have bluntly observed, the markets care almost exclusively about the strait reopening and the resulting flow of oil and commodities. They care far less about the nuclear dimension or the other provisions touching on terrorism. What investors fundamentally want to see is the restoration of those commodity flows and the favorable implications for inflation that follow.
A New Fed Chair and the Problem of Bad Data
Turning to the Federal Reserve and the new chair's first meeting in that role, there is genuine encouragement to be found in the emphasis placed on a task force aimed at improving the economic data the central bank relies upon. This addresses a long-standing complaint: the data underpinning some of the most consequential decisions in the economy is mediocre at best.
A prime example is Owners' Equivalent Rent (OER). Almost no one can figure out how that figure is calculated. Presumably someone can, but the methodology simply does not make sense in the current era. It may have made sense at one time, when people commonly rented one- or two-bedroom homes, but that is not how the housing world works anymore. In an age of real-time tools like Zillow that track rent prices as they move, the inputs the Fed uses are badly outdated. Had the Powell-era Fed been watching real-time rent data, it would have reacted to inflation much sooner — and, just as importantly, it could have begun backpedaling and easing much sooner as well. Incorporating real-time data sources is therefore valuable. Trueflation is one example of such an alternative that circulates widely; it should not be treated as a be-all and end-all, but the underlying idea of folding in additional, more timely data is sound.
The jobs numbers suffer from similar defects. They are plagued by awkward, sometimes dramatic revisions that are, frankly, awful. The data is still gathered through a survey methodology in which respondents fill in forms — an approach that feels anachronistic today. There ought to be some incentive structure to make this information real-time. For instance, employers could be encouraged to hand over their payroll data in exchange for payment or a tax reduction. It is close to insane that the Fed makes its biggest economic decisions on the basis of such weak inputs. The same critique extends to the Bureau of Labor Statistics. There is real value in the idea of throwing out the existing apparatus and rebuilding the data infrastructure from scratch. The rest of the world is working on artificial intelligence, while in this domain the United States still appears to be working with crayons and pencils.
Less Communication, Not More
On the question of communications strategy, the new chair repeatedly deflected pointed questions — particularly on forward guidance — by referring them to a task force. Journalists in the room could be sensed pressing hard on this, given how conditioned the market has become to extracting signals from Fed press conferences. Yet there is much to like in this approach.
The history here is instructive. When there was no forward guidance and the Fed first introduced it, the tool was highly impactful: it smoothed markets and clearly told everyone what the central bank intended to do. But the practice has since become excessive. Now everyone spends their energy trying to anticipate what the forward guidance itself will be, and what will be said at the next meeting — a dynamic that has become a little insane. The better path is to go back to less communication. Everyone already understands that policy is data-dependent. The Fed does not need to signal eight different times between meetings what it might do at the next meeting. Moving the Fed away from this daily communication cycle — in which observers obsess over the next move — and toward longer-term strategies would be a healthy change.
There is a market-mechanics argument reinforcing this stance as well. Clients had been warned in advance that if the new chair came across as dovish, the long end of the yield curve would suffer. By instead coming across as hawkish — "cross, hawkish" — he protected the long end. He appears to have played this correctly, and likely cleared the posture with Trump beforehand. The logic he seems to have followed is that the Fed cannot afford to be dovish in an era when jobs look good and inflation has been high, even if inflation may eventually come down. He set the stage very well. This revamp of the Fed, along with reform of the BLS, is something long overdue.
The Market Reaction and "Fake Liquidity"
The market reaction is worth examining closely. Heading into the meeting, markets were already pricing in better than an 80% chance of a rate hike in 2026, and there was a prevailing sense that the bond market was already doing the Fed's job for it. The meeting then delivered a somewhat more hawkish dot plot than many had anticipated. Beyond the comments on the task force, there were not a great many surprises, yet markets still produced a substantial move in the two-year yield, and the dollar climbed to its highest level in more than a year. One apt characterization of the chair is that he is a "hawk in dove's clothing."
The equity reaction was somewhat surprising. Equities kept selling off after the press conference, and then, the following morning, reversed and rallied positively with surprising speed. This whipsaw illustrates a key portfolio-management concept: what can be called flow liquidity, or fake liquidity. Markets appear very liquid, but moves tend to get exaggerated — especially at the end of the trading day and the start of the next — partly because of algorithmic trading and partly because of leveraged ETFs. There was probably too much price action in the immediate aftermath, and the subsequent reversal is simply some of that excess being given back. Conditions should normalize over the following days.
Underlying all of this are two competing threads, each pulling in a similar direction on inflation. On one side is the reopening of the Strait of Hormuz, which lets inflation come down in the near term. On the other is a hawkish Fed, which should lower inflation expectations. Because both forces work to control inflation, the combination is actually good for the bond market. That favorable backdrop for bonds is likely part of the reason equities performed better than expected the morning after — a constructive outcome emerging from what initially looked like a turbulent and contradictory set of signals.
