Dominique Dwor-Frecaut
Summary Markets expect more tightening than the Fed, contributing to a substantial flattening of the yield curve. Historically, the yield curve has provided unusually strong recession signals, particularly 12–24 months ahead. The 2022–24 false positive shows the need for a reality check: permits, orders, and profits provide useful shorter-horizon signals. The Fed cannot escape implicit […]
Dominique Dwor-Frecaut
Summary The administration’s dollar policy seeks to reconcile a strong dollar with a manufacturing renaissance. Dollar and balance of payments trends seem to signal some erosion in foreign confidence in dollar assets. The election results could support the dollar primarily through reduced policy uncertainty: stronger congressional constraints on executive discretion could reduce the risk premium […]
Dominique Dwor-Frecaut
Summary The Fed hiked in line with market expectations. The dot plot signaled mid-cycle recalibration, rather than the start of a tightening cycle, with the median dot showing two 2026 hikes, a hold in 2027, and gradual cuts thereafter. Warsh focused on slow disinflation and upside inflation risks, suggesting further tightening if disinflation does not […]
Dominique Dwor-Frecaut
Summary Low unemployment leaves inflation as the key concern, with disinflation proceeding too slowly. Fedspeak has turned more hawkish, and August CPI likely failed Waller’s test for a September hold. I expect a 25bp insurance hike this month, followed by a hold through 2027 and resumed normalization in 2028. With hindsight, the 2024–25 cuts may […]
Dominique Dwor-Frecaut
Summary The NY Fed’s MCT is the best overall one-year-ahead predictor of headline PCE; acyclical core PCE has performed at its best since 2023. Core PCE has recently been boosted by legal services, portfolio management, and software—the same categories BEA will revise in September. Excluding these categories lowers current core PCE inflation by about 0.5pp […]
Dominique Dwor-Frecaut
Summary I review the Jackson Hole Symposium papers, focusing on tokenization and AI. Tokenization could transform finance by enabling cheaper, atomic, and 24/7 transactions, but scaling it requires access to a safe settlement medium; JH participants favored tokenized central-bank reserves over stablecoins. The ECB and SNB are ahead of the Fed in implementation, potentially giving […]
Dominique Dwor-Frecaut
Summary I am lowering my probability of the Fed remaining on hold through 2026 to 51%, from previously 55%, following Warsh’s more hawkish-than-expected Jackson Hole speech. The 51% probability conveys finely balanced risks, still marginally favoring a hold. Now that Warsh seems to favor a hike, Waller has become the swing voter. If on Thursday […]
Dominique Dwor-Frecaut
Summary I base my Fed view on what the Fed will do, not what it should do. I start with Fedspeak, assess the data outlook, and map both into the Fed’s reaction function. Fed policymaking is fundamentally risk management: slack and inflation are difficult to assess in real time, while R*, financial conditions, and policy […]
Dominique Dwor-Frecaut
Betting markets assign the highest odds to Warsh mentioning AI and long-term Fed reform terms at Jackson Hole, and the lowest to near-term economic and policy terms. Inflation is likely to feature, but the low odds on near-term economic terms suggest it will be framed mainly around the Fed’s commitment to price stability. Table 1: […]
Dominique Dwor-Frecaut
Summary The growth–unemployment relationship—Okun’s Law—remains intact, supporting the signal from today’s low UR despite conflicting labor-market data. Stronger productivity and slower labor-supply growth explain why weak hiring can coexist with solid growth and stable unemployment. Breakeven growth is likely more useful than breakeven NFP in predicting unemployment. Weak NFP alone is unlikely to trigger Fed […]
Dominique Dwor-Frecaut
Summary Despite recent announcements, the administration has kept the average tariff rate near 11%, well below the 20% Liberation Day peak. This restraint likely reflects both the limited economic and market benefits of tariffs and their substantial political costs. Tariff policy is therefore unlikely to become a renewed source of inflation. Market Implications I expect […]
Dominique Dwor-Frecaut
Summary The Treasury has taken the unusual step of intervening alongside Japan. The Treasury’s suggestion that the Fed funds Japan FX intervention could reflect the Treasury’s limited firepower as well as concerns over rising bond yields. Heeding the Treasury call could create perceptions of fiscal dominance and further lift the Treasury’s term premium. Market Implications […]
Dominique Dwor-Frecaut
Let’s face it. Deep down I am a contrarian. The louder the anti-Warsh chorus, the stronger the urge to play defense. So here it goes: The Fed’s job is not market happiness but fulfilling the employment and inflation mandate set out by Congress. Policy credibility is not established by acting or talking tough, but by […]
Dominique Dwor-Frecaut
Summary As I expected, the Fed remained on hold, the statement was virtually unchanged, and Warsh continued not to provide guidance on the FOMC economic assessment, reaction function, and policy direction. Markets reacted negatively to the guidance vacuum, interpreting it as a sign of an unwillingness to tackle inflation. Market Implications My base case continues […]
Dominique Dwor-Frecaut
Summary I expect the Fed to remain on hold, with an unchanged statement and dissents from Hammack and Logan. Warsh is likely to stick to his strategy of revealing little about his assessment of the economy, his reaction function, or the future policy path. Market Implications My base case remains Fed on hold until end-2026, […]
Dominique Dwor-Frecaut
Summary The war could evolve into a prolonged, low-intensity conflict punctuated by periodic flare-ups. The conflict is likely to remain limited to an air and naval campaign, containing its fiscal cost. Defense spending is still likely to surge: even if Congress rejects the administration’s proposed 50% increase in FY2027, a substantial increase remains likely. Historically, […]
Dominique Dwor-Frecaut
Summary Warsh has revived money as a policy indicator, but not monetary targeting: his approach is “monetarism-lite,” with money complementing rather than replacing inflation targeting. Velocity is not stable: its long-run decline reflects financialization and banks’ shift away from lending to the real economy, limiting the usefulness of money growth as a policy guide. The […]
Dominique Dwor-Frecaut
Summary I changed my Fed call from one insurance cut to no cuts through end-2026, largely because I expect a more hawkish Fed reaction function. Under Warsh, policymaking has shifted away from Powell’s consensus-building toward “good family fights,” giving individual FOMC participants greater influence. Since most participants are more hawkish than the Chair, this raises […]
Dominique Dwor-Frecaut
Summary I expect the Fed to remain on hold while shifting to a neutral bias, with no dissents and a dot plot showing no cuts in 2026 and one cut each in 2027 and 2028. I expect a neutral-to-dovish press conference. With both the data and the FOMC constraining his room for manoeuvre, Warsh could […]
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