10 Doves, 2 Hawks, and a Partridge in a Pear Tree

Episode Summary

Executive Summary: The podcast focused on the Fed’s recent 25 bps cut, which the hosts saw as broadly consistent with expectations but surprisingly mixed in tone: hawkish in its data dependence and higher growth projections, yet dovish in Powell’s emphasis on weakening labor markets, tariffs, and likely job losses. They also debated labor-market signals, UI claims, gig work, and why a higher inflation target may be worth reconsidering.

Main Topics: Fed cuts rates but sends mixed signal (Priority: 5/5): The FOMC cut rates by 25 basis points, with dissent from two officials wanting no cut and one wanting a larger cut. The hosts debated whether Powell’s message was hawkish or dovish, concluding it contained both elements but was arguably a hawkish cut overall. Labor market weakness and job revisions (Priority: 5/5): Powell’s comments about likely downward revisions to job growth since May and possibly negative employment were a major point of discussion. The hosts argued that if those revisions are accurate, the labor market is materially weaker than headline data suggest and may warrant more easing. Inflation, tariffs, and the outlook for additional cuts (Priority: 4/5): Powell linked higher inflation to tariffs, while suggesting services disinflation is offsetting goods inflation. The hosts viewed this as supportive of the case for further cuts, especially if tariff effects are temporary or concentrated in goods prices. Market pricing vs. Fed/house forecasts (Priority: 4/5): They compared futures pricing, the Fed’s SEP, and Moody’s Analytics forecasts. The market is not aggressively pricing cuts early next year, while Moody’s expects more easing than both the market and the Fed median. Questioning labor indicators and gig work (Priority: 3/5): A listener question prompted discussion of whether gig work is reducing UI claims and obscuring labor-market distress. The hosts agreed this is plausible and said traditional claims data may miss parts of the modern labor market. Why 2% inflation target? (Priority: 4/5): The hosts answered a listener question on the logic of a 2% inflation target and why the Fed doesn’t target unemployment. They argued 2% is largely convention, with higher targets offering more policy room, but transition risks make change difficult. Equity markets and recession signals (Priority: 3/5): Despite the hosts’ labor-market concerns, the S&P 500 hit a record high, which Mark framed as historically inconsistent with imminent recession. The group noted this creates tension between market optimism and macro warning signs.

Key Arguments: The Fed’s 25 bps cut was expected, but the combination of two no-cut dissents, one larger-cut dissent, and Powell’s emphasis on data dependence made the overall message less dovish than the rate cut alone suggested. Powell’s labor-market remarks were the most dovish element: if job growth has been revised down by about 60,000 per month since spring and employment is near or below zero, more cuts become harder to avoid. The dissenting voices and the statement language imply the Fed is close to neutral and may not cut again soon, which is why the hosts described the meeting as a hawkish cut. Tariffs appear to be adding to inflation, but services disinflation is offsetting them; without that offset, inflation would likely be much higher than 3%. Moody’s forecast calls for three additional quarter-point cuts next year, more easing than the Fed’s median projection of one cut and more dovish than current market pricing. UI claims may understate labor-market weakness because laid-off workers may move into gig work or other nontraditional arrangements rather than filing for unemployment insurance. A sustained period of negative or near-zero payroll growth is hard to reconcile with avoiding recession, especially if layoffs begin to accelerate after a long period of weak hiring. The 2% inflation target is not magical; it is mostly a convention chosen to avoid deflation, but a somewhat higher target would give the Fed more room before hitting the zero lower bound. The Fed does not target unemployment with a fixed number because the equilibrium unemployment rate changes with demographics, labor-force churn, and structural shifts. Record-high equity prices complicate the recession narrative, since historical patterns suggest recessions are usually preceded by a meaningful stock-market decline.

Data Points: Fed funds rate cut: 25 basis points - FOMC decision this week Dissenters on FOMC: 3 - One wanted a 50 bps cut; two wanted no cut Potential job-growth revision: -60,000 jobs per month - Powell said monthly payroll growth since May may be revised down by about 60K Unemployment rate: 4.4% to possibly 4.5% after revision - Hosts discussed the labor market drifting higher in unemployment Expected payroll change next week: 0 to negative - Hosts anticipated October/November catch-up payroll reports to show weak or negative growth CPI inflation forecast: 3.0% y/y - Expected November CPI inflation reading and current level Fed inflation target discussed: 2.0% - Listener question on why the Fed targets 2% inflation Alternative inflation target suggested: 2.5% to 3.0% - Hosts argued a somewhat higher target would offer more policy room UI claims four-week average: 217,000 - Used as evidence that claims remain very low despite layoff concerns Continuing claims: 1.8 million - Discussed as still low despite some recent bumping around UI replacement rate: About 31% of prior wages - Marissa noted average UI benefits replace roughly a third of wages Job openings: 7.67 million - Chris chose this as the weekly stats game number from JOLTS S&P 500 level: 6,901 - Mark cited the index hitting a record high as a possible recession counter-signal Fed futures pricing for January: 75% no cut - Market pricing discussed by the hosts March Fed futures pricing: About 40-50% for a 25 bps cut - Hosts said pricing becomes more balanced by March Chance of 50 bps cut: 8% - Market-implied probability mentioned during discussion Moody’s forecast: 3 additional 25 bps cuts - Forecast would bring the funds rate back toward 2.75%

Pivotal Quotes: "I wouldn't classify anything as terribly surprising, but yeah, the dissents are a little bit anomalous versus previous meetings." — Chris: Summarizing the Fed meeting and its unusual level of dissent "I thought that was a dovish kind of meeting, but..." — Mark: Arguing that Powell’s labor-market comments outweighed the hawkish elements "The only reason inflation isn't higher is because service disinflation is now offsetting goods inflation." — Chris: Explaining Powell’s inflation/tariff framing

Implications: Listeners should expect a cautious Fed, weak labor data, and continued debate over whether tariff-driven inflation and job losses justify more cuts. Markets may stay volatile as recession fears conflict with record-high equities and uncertain labor indicators.