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.