Holding the line while the political side of the Fed loses the plot

I don’t usually write critical bits on the Fed, but it’s getting a bit obvious that politics is slipping into the picture. And I’m not talking about gimmicks like turning off the escalator when Trump arrives for a visit or short-circuiting his teleprompter. What’s creeping in is more subtle — a sense that policy communication itself is being bent by political gravity. The constant hedging, the selective emphasis, the way dots and speeches diverge within a week — it’s starting to look less like a central bank offering neutral guidance and more like a committee split between managing markets and managing optics.

When the FOMC delivered its 25bp “insurance cut” last week, traders took the message at face value. The dot plot pointed to two more cuts in 2025 — October and December — with the median shifting up from June’s projection. Powell’s press conference underlined that downside risks to employment had become too large to ignore. For markets, the signal was straightforward: the Fed had pivoted decisively toward protecting the labor market, and the path forward was mapped. Risk assets responded in kind — stocks caught a bid, gold rallied, the dollar softened. It felt like the game board had been reset, and the strategy was clear.

Read between the lines, and the tea leaves even hinted at something even bigger: the Fed seemed willing to look through a modest overshoot in inflation. In other words, 3% is the new 2%. This subtle but critical shift has been echoing in recent Fed chatter — the idea that the old orthodoxy of pinning inflation precisely at 2% belongs to another era.Central bankers are increasingly comfortable with inflation lingering above target so long as it isn’t accelerating, treating price stability as a broad zone rather than a single number. For traders, that tolerance is everything: it validates easier policy even if inflation refuses to fall neatly back into the textbook box, and it tilts the Fed’s dual mandate firmly in favor of jobs over purity on prices.

Fast forward just a week, and confusion has crept in. At least some of the current cast of Fed characters are already trying to walk back the very narrative the median projected only days ago. Those dots unambiguously pointed to two more cuts; now speeches are being salted with caveats and half-hearted attempts to cool enthusiasm. The problem? Nothing has shifted in the data to justify a walk-back. Payrolls remain soft, inflation hasn’t reignited, and even the tariff shock that was supposed to ripple through prices has shown only a limited pass-through so far.

The latest PMI price readings, along with CPI, reinforce the picture of a muted direct impact. As we’ve argued in recent weeks, the most likely outcome is a gradual, measured pass-through — not the kind of sudden price shock that unmoors inflation expectations or sparks second- and third-round effects, unless the underlying economy suddenly proves far stronger than what labour market indicators currently suggest. Against that backdrop, traders are left scratching their heads — why talk dovish with one breath and then hedge with the next?

For those running risk, this inconsistency is maddening. Markets price forward guidance; they map trades around projected policy paths. If the Fed cannot stand behind its own projections for more than a handful of sessions, then positioning becomes a guessing game, not an investment decision. The sense on my desk is one of frustration: the Fed gave the green light, then quickly reached for the yellow flag.

This is why rate-cut trades are still being held and not panicked out. If there’s been no meaningful change in the data, the dots still represent the core of the committee, and Powell himself made it clear that labour market weakness outweighs inflation’s last mile, then the base case hasn’t shifted. The market is right to lean on easier policy and risk-on conditions, even as some Fed speakers attempt to temper enthusiasm.

And yet, the broader problem is bigger than this week’s muddled communications. Central bankers are supposed to be the guardians of stability, the stewards of money’s value, the ones who keep the compass pointing north when markets start to drift. Under Jerome Powell, that compass has looked less like a guiding instrument and more like a toy spinning in circles. Each policy shift, each speech, leaves traders wondering whether the Fed is reading the map or just improvising as it goes.

From the moment he squared off against Donald Trump, Powell transformed into more than a central banker: he became a foil, a counterweight, a man defined as much by politics as policy. If Trump said “yin,” Powell felt obliged to say “yang.” Unfortunately, it seems that half of the Fed camp is also in that political abyss.

Opinion

I, for one, am looking forward to the Fed’s makeover — a central bank willing to move off the dogma of hard inflation targets and, more importantly, one that can finally provide traders with tangible guidance. For years, markets have been forced to navigate a hall of mirrors: promises of 2% inflation as an inviolable anchor, only to watch reality wander well above or below without the Fed adapting its framework. The new stance — where 3% is tolerable so long as it isn’t spiraling — feels less like capitulation and more like recognition of how modern economies actually function.

What markets crave is not perfection but consistency. Traders don’t need the Fed to hit a bullseye on CPI; they need to know which direction the compass is pointing. If the Fed’s makeover means a shift toward pragmatism — tolerating modest inflation overshoot while anchoring policy around labor market stability — then guidance becomes actionable, not aspirational. That’s what drives positioning. That’s what allows investors to put capital to work with conviction rather than second-guessing every speech.

A Fed that trades flexibility for rigidity is not a weaker institution — it’s a more useful one. And for markets, usefulness is the only credibility that counts.