The Fed – mime versus meme

Daily update

Markets are expecting no change in US monetary policy today. Federal Reserve Chair Warsh’s communication style does not lend itself to offering clarity as to the policy outlook, either.
The Fed’s problem is a one-off supply shock inflation episode that they cannot control. Unfortunately, this is the fourth consecutive one-off shock. To a lay person, that looks like continuous inflation (it is not; what rose in price last year is not what is rising in price this year). Better communication might help change perceptions; consumers are rarely rational when assessing inflation. The Fed’s response is to raise rates to the top of the neutral range to show it is doing something, without actually affecting anything. The risk is that it misjudges where neutral is, or investors believe the moves herald a repressive policy and a non-oil economy recession.
The Wall Street Journal reports the US warned Gulf countries it may pursue a short, intense campaign against Iran after the midterms. Investors are unlikely to focus on the description “short”, and oil prices have risen. The war has reportedly cost the US USD 47bn already.
Israel’s election result appears inconclusive at the moment. This will likely leave Prime Minister Netanyahu in office (and in control of the military) for the time being.