The Fed's Confusing Story
The Federal Reserve cut rates by 25 basis points. The cut was expected. The surprise was the unanimous vote, which showed broad support inside the Fed. After the Jackson Hole speech, the Fed was boxed in and had to move.
The summary of economic projections and the dot plot leaned dovish but told a mixed story. The Fed projects inflation to fall sharply next year, close to its June projections. The dots showed broad support for one more hike this year, then rates holding steady next year. The statement framed this cut as a way to bring inflation back to target on a more timely path. Their own targets do not show inflation hitting target until 2029, which is a stretch for the word "timely."
Chair Warsh sounded more hawkish. He said he was hard-pressed to call monetary policy restrictive, and there was broad support for that view. He described the move as removing a dose of accommodation. That points to unwinding the rate cuts from the end of 2024, which suggests two to three possible hikes from here.
Warsh had said he would not do all the signaling past chairs did, and this may be a slow off-ramp from that kind of communication. The press conference was shorter, but it still carried material information. He called it a sober, serious decision, not an easy one. Like in June, he did not submit his own projection in the summary of economic projections; he has pushed back on that as a Fed tool. Once his task force reports, that projection may drop out of the Fed's communication.
Warsh said the economy is holding up even with elevated oil prices, and that inflation has been too high for too long. President Trump asked why hike at all. The Fed gained a little credibility in its inflation fight by moving.
Why Markets Ran
Stocks sold off the day before and rallied hard the next morning. A big driver was oil falling about 3%. There were reports that China is pushing harder to get Iran and the Houthis to step back, which helped oil move lower. Trump's comments and reports that he would meet Middle East leaders at the UN added to the move. Lower oil pulled Treasury yields down with it.
This week is triple witching expiration, which brings choppier, more volatile trading. The day before, the S&P 500 (SPX) fell about 1% at its lows and tagged its 100-day moving average, then cut those losses in half in the final 30 minutes. That points to a positive gamma position, where dealer and options hedging dampens moves.
Solid corporate updates came out of conferences. AI headlines were positive: the neoclouds signaled possible price increases, and CoreWeave (CRWV) announced another deal to sell more compute to customers. The AI trade drove the market again. The S&P 500 pushed to fresh highs, sitting just above the pre-meeting level, reversing the entire sell-off and running roughly 10 to 20 points above where it opened the prior day.
