An investor who managed $40B+ in credit wrote this brief explainer on some of the workings behind the scenes. He has zero presence on social media, and let me publish the memo to get the word out:
Subject: Fed Tricks 101
With the Fed planning to raise rates again next week, just thought I’d pass along WSJ commentary from Alan Blinder that largely reflects the comments/opinions I made last month (ok, I don’t mind admitting I’m selective with my evidence 😎)
Fed trick #1 - what do you do when you’ve advertised for weeks “with a neon sign” you are going to raise rates 50 basis points… but then inflation posts a hot number and you receive a call from the White House pleading “dooooo somethingggggg!!!”?
You leak to the press you will raise rates 75 bps so that the stock market crashes 10% over 3 days prior to your meeting, rather than crash 10% on the day of your announcement. Mom & pop investors get hosed, but hey that’s just the price of covering your butt.
Fed trick #2 - what do you do when two back-to-back hikes of 75bps only one month apart (when it can take months for each hike to filter through the economy) could be imprudent…. But you are still getting those pesky phone calls
Suggest you are considering a 100 bp hike! It’s never been done in the modern era, but still, people might be relieved when you settle for a “smaller” hike
Blinder boasts (below) that his Fed team actually achieved a soft landing in the 90s using a less panicked approach, so worth a read