Notes on the Week Ahead

This Wednesday, at 2:00 PM, the Federal Reserve will release a statement on monetary policy. It will, as usual, be a brief and colorless document and will look paler still in comparison to the more than 60 executive orders, proclamations and memoranda that have emanated from the White House in the first week of the President’s new term. However, the Fed’s statement and Jay Powell’s press conference could well be of equal importance to financial markets.

“Unsustainable!” To quote Inigo Montoya: “You keep using that word. I do not think it means what you think it means” For decades, journalists, economists, politicians, and central bankers have said that the U.S. federal debt is on an “unsustainable” path.  However, it has stayed on that path, climbing from a very manageable $3.3 trillion, or 31.5% of GDP, in fiscal 2001, to $28.3 trillion, or 98.2% of GDP in fiscal 2024.

In football, it’s always better, at the snap of the ball to disguise your intentions. Are you going to pass or run the ball? Is it a zone defense or man-to-man?  In business or in military maneuvers the same rule applies – keep them guessing. However, in macro-economic management, it is better to make your plans clear.  That way businesses can feel more confident in hiring and investing, as can consumers when deciding to buy.  It is one of the reasons the Federal Reserve publishes a quarterly Summary of Economic Projections (or SEP) and so frequently repeats its determination to achieve 2% inflation. 

Over the holiday season, we got to spend some time with our very charming granddaughter and, as a bonus, I am now fully re-acquainted with all the verses of “The Wheels on the Bus”. As we enter 2025, the American economy is rather like an old school bus – slow but steady, reliable and resilient. It generally moves forward. However, it is not invulnerable. The wheels of the bus are being pulled off the ground by ballooning asset prices. The new driver of the bus may or may not try some dangerous policy maneuvers. The wipers of the bus may be obscuring obstacles in the road ahead. And the people on the bus, instead of spreading out and sitting down, are all standing up, crowded to one side so that if something does go wrong, there could be significant injuries.

When testifying to the Senate Banking Committee back in 1987, the newly-appointed Fed Chairman, Alan Greenspan, provided some insight into his views on communication: “Since becoming a central banker”, he said, “I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” His successors have generally tried to be more open with regard to both their opinions and their intentions. However, there are times, when the Fed will want to communicate to financial markets without piquing the interest of either the general public or the administration.

Many years ago, I worked for the Office of Revenue and Tax Analysis at the State of Michigan and, from time to time, Saul Hymans and his colleagues from the University of Michigan would visit the state government in Lansing to discuss the latest output from their macro economic models of the U.S. and Michigan economies. As they started into their presentation, I was always eager to hear about their forecast. However, I was rather puzzled about how much time they devoted to the current quarter. I mean they had a big macroeconomic forecasting model – couldn’t we just skip the present and move on to the future?

Market dynamics are heating up with purchasing manager surveys and light-vehicle sales indicating steady November demand. A closer look at unemployment data suggests payroll growth might bounce back after October's slump. The Fed's looming rate cut decision hinges on inflation indicators and new policies. Meanwhile, Ireland's elections showcase the perks of proportional representation and heightened voter engagement, contrasting sharply with the U.S.'s political stagnation. The discussion highlights Ireland's progressive changes against the backdrop of U.S. polarization and investor strategizing.

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The most urgent task facing investors in the wake of the 2024 elections is figuring out how much of the Trump agenda, as broadly outlined on the campaign trail, will be put into effect. A full and literal implementation across taxes, trade and immigration could have unwelcome consequences for the economy in both the short and long run. A more partial implementation, (which seemed to be anticipated by financial markets last week), could net out to be positive for stocks and negative for Treasuries in the short run. However, even this more restrained policy path would likely result in sharply-rising government debt and the potential, in some areas, for building economic and market risks. For this reason and because of the further run up in the U.S. equity valuations in the wake of the election, investors would be well advised to continue to rebalance portfolios both across asset classes and around the world.

The last few weeks have seen spectacular weather in New England, with warm temperatures and blue skies almost every day. By now, we would normally have stored the back-yard furniture inside to prevent it getting ruined over the winter. But instead, on weekend afternoons, Sari and I drowsily read our books in the sunshine with the still-loud chirping of the crickets letting us pretend that summer isn’t really over. Nor is there any harsh weather in the near-term forecast – it should be in the 70s on Thursday when the trick-or-treaters set off on their rounds. But the gentle rustle of falling leaves is providing its usual warning of colder days ahead and the need to be prepared.