The Fed is at "war" with itself. It says one thing when appropriate and helpful for its communication strategy and then ignores it or says the opposite when it isn't consistent with its message or supported by the data.
Policymakers argue, on the one hand, that the current stance of monetary policy is restrictive. Still, they raised their growth estimates at each quarterly forecast since March 2023. Shouldn't a restrictive policy result in consistently slower growth?
Policymakers argue that economic growth must slow down to achieve its inflation target. Still, they are unbothered and ignore the team's higher growth and inflation forecasts because it contradicts their message of lower rates ahead. How can lower official rates achieve their inflation mandate when higher rates have not so far?
Policymakers, especially Fed Chair Powell, have long argued that overall financial conditions reflect the policy restraints it is imposing to achieve its inflation mandate. Yet, policymakers overlook or ignore the dramatic easing in financial conditions, primarily driven by a double-digit equity price gain, because it contradicts their message. If financial conditions were easy today, what would they look like after three official rate cuts, and what are growth and inflation implications?
The Fed's war with itself will eventually become a war with investors as policymakers' promise of an easy monetary policy is underwriting growth and inflation conditions inconsistent with their mandate and unsustainable financial conditions as well.