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BCA Summary: The Fed's Role

Released 2/11/2019


The Fed’s role is commonly misunderstood, even by sophisticated investors: It seeks

to lean against the business cycle, not eliminate it entirely.


The idea of the “Fed put” has gone too far: The Fed is indifferent to mundane market

moves; it only cares about big swings that could have a material impact on the economy.

Investors hoping for an at-the-money put to indemnify them against potential losses

will be sorely disappointed.


The dual mandate is alive and well: Monetary policy may be better situated to defending

price stability than promoting full employment, but the employment mandate was

a key catalyst for lower-for-longer rates, and the negative unemployment gap better

explains the current tightening cycle than still sluggish inflation prints.


The Fed’s propensity to lean against the cycle means that economic strength will prove

self-limiting while the expansion is in its latter stages: Risk assets can rally while the

Fed’s on hold and economic data are robust, but the stronger the data, the harder the

Fed will ultimately have to clamp down.

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