Powell's hall of mirrors and 'If you give a mouse a cookie'/Other notables

With all due respect to Jay Powell, he seemed in the press conference to be wandering around in a hall of mirrors, trying to find his way in reconciling all the puts and takes, reading from prepared answers to expected questions and rationalizing the Fed's policy moves. On the path to a 'neutral rate' he admitted again that 'we don't know exactly where it is,' I paraphrase. On the VERY easy financial conditions we've had, he was dismissive again of them essentially saying inflation and the labor market are their main focus. Of course on the flip side as seen over the past few decades, they did everything they could to ease financial conditions when they tightened up.

The markets response reminded me of the children's book "If You Give a Mouse a Cookie" which I'm sure you read to your kid or grand kid or niece/nephew as I did to my son. If you aren't familiar, a boy gives a mouse a cookie. The mouse then wants milk with the cookie and the boy gives it the milk. The mouse then wants a straw to drink the milk and gets it from the boy. The mouse then asks for a napkin and you get the point. The Fed gives the market some guidance on rates and the market then goes too far with pricing it. After the 50 bps rate cut in September, the fed funds futures market then went on to price a December 2025 rate of about 2.80% and it was within a day of that meeting that a Fed member had to reign in the market. That rate today stands at 3.97%.

Going into yesterday's Fed announcement and dot plot, the December 2025 contract was pricing in EXACTLY 50 bps of cuts next year, thus 2 more of 25 bps. And the dot plot went to EXACTLY that. Instead of accepting that the Fed is now more in-line with the market pricing, market pricing took it even further and now there is just a 44% chance of a 2^nd cut by year end 2025. The first cut for next year is now fully priced in by July.

So, yesterday's bond and stock market move was not on some shock thing by the Fed, as again, the Fed just shifted to what the bond market had ALREADY priced in, but maybe a reversal of a market that got way too giddy over the past month, that got way too frothy in certain parts of the market and priced itself for no room for error.

That said, at least still, higher for longer interest rates is a real thing.