Good Wednesday AM, and best day of the week,

No news other than it’s Fed day!

The Fed will probably pause rate increases for a second time this year and keep borrowing costs in a range of 5.25% to 5.5%, in its policy decision Chair Jerome Powell, who will hold a press conference 30 minutes later, has signaled that Fed leaders would prefer to wait to evaluate the impact of past increases on the economy as they near the end of their rate-hiking campaign. I don’t want to say this too loudly to anger the gods but this is the first Fed meeting in a long time I recall bonds having an up day heading into the meeting. Equities are up as well. Maybe a little less fear right now. We will know more in about 2.5 hours.

I enjoyed these pieces from Bloomberg and the WSJ as they bring in other external factors into the conversation of the rate path..

What to Watch at Today’s Fed Meeting

Federal Reserve officials are set to hold interest rates steady at their meeting Wednesday while debating what it would take for them to lift borrowing costs again this year. The public’s attention will focus heavily on officials’ quarterly interest-rate projections displayed in the so-called “dot plot.” The median projection is likely to show officials expect to raise the Fed’s benchmark federal-funds rate at least once more this year.

The big Wall Street banks are unanimous in their view that there will be a pause in the rate hike cycle today. Then from there it’s TBD. Lately there has been a whiff of anxiety about further upward inflationary pressure (The rise in oil prices probably has something to do with that) and so a lot of attention will be paid to the dots. As it stands right now, several FOMC members see some kind of rate cuts in 2024, and one question is whether these dots get moved up, with cut expectations pushed out further into the future.

All that being said, while today is a day for monetary policy, what’s clearly on a lot of people’s minds is fiscal policy. This is a chart I like to post from time to time, showing how historically there was a fairly visible link between deficits (as a share of GDP) and the unemployment rate. And yet that has totally broken down, with deficits having jumped, despite rock bottom unemployment.

Rising deficits along with rising rates is calling attention to the increased spending that’s just on interest payments alone. Big names like Bill Gross, Jeff Gundlach, and Ray Dalio have all been talking about fiscal dynamics lately. But it’s not just investing boldfaces on this beat. It was something that was clearly on the minds of attendees at Jackson Hole last month, with Barry Eichengreen having delivered a paper on the subject while there.

Various pundits and commentators have been on this beat. Noah Smith had a big thing earlier this week on why an age of austerity would inevitably arise. Citrini Research posted a big piece this week on the era of US fiscal primacy. Lots of others have been talking about it as well, in a way that feels somewhat new vs. the deficit and debt hawks of yore.

There’s a lot of different angles that one can go with to explore fiscal policy. But here’s two related things I’ve been wondering about. One is that in the past, rates would somehow come lower as part of an implicit deal between the Fed and the fiscal authorities. Under Volcker and Greenspan, there were at times more or less explicit messages that if Congress and the President would do some kind of deficit reduction, then rate cuts were more likely. So it’ll be interesting to see whether any version of that politics re-manifests itself.

Also in the 2010s, the big story was slow employment growth, and an inability to hit the Fed’s inflation target from the other side. Inflation kept coming in lower than 2%. And the 2010s were, of course, an era of relative fiscal modesty, with divided government helping to take any big spending bills off the table. So you gotta wonder whether we’re back to that theme, where fiscal plays a big role in determining whether inflation gets fully back to the Fed’s goals or not, except from the other side, and whether sustained, abnormally large deficits keep us in an era where the inflation “misses” continue to be to the upside.

Oil is close to $100 a barrel, posing a new challenge for central banks in their battle against inflation. Saudi Arabia and Russia sparked the rise in prices early this month when they said they would restrict supplies until the end of the year. Meanwhile, record levels of oil demand—fueled by unexpected economic strength—have outstripped production. Many analysts expect crude prices to keep rising, which would feed into higher fuel bills, quicker inflation—and, potentially, higher interest rates, Joe Wallace and David Uberti report.

Please remain safe and healthy, make today great and keep your fingers crossed for a dovish slant to the FOMC announcement.