Tom Keene on "Expost Squared": Inflation, Growth, and the Fed's Dilemma

The Fed's "Expost Squared" Dilemma

• ❓ The upcoming Fed meeting is characterized by "expost squared", meaning the Fed is concerned not only about inflation but also about jobs and economic growth.
• ⚠️ This dual concern creates a complex decision-making environment, as the Fed must balance potentially conflicting economic signals.

Stagflationary Concerns

• 📈 Stagflation is identified as a key concern, with models predicting a 1 percentage point increase in inflation over the next 12 months.
• 📉 Simultaneously, there are indications of less economic activity, posing a challenge for the Fed's policy direction.

Dot Plot and Growth Focus

• 🎯 The dot plot suggests the Fed is leaning towards prioritizing growth, as it indicates a potential rate cut.
• ⚠️ This raises questions about whether cutting rates is appropriate if inflation is expected to rise, referencing historical decisions by Arthur Burns and Paul Volcker.

Soft vs. Hard Data

• 📊 A typical pattern observed is that soft survey-based data erodes before hard data, reflecting forward-looking expectations.
• ⏳ The Fed is expected to wait for hard data to validate these trends, potentially leading to policy being enacted late.
• 🏦 The market's reaction to the Fed being late will be a critical factor to watch.